For the Record
Earlier versions of this story, which also ran in today's newspaper, incorrectly stated that the ruling will affect cases involving auto accidents and medical malpractice. Federal tax law exempts compensation for such "personal injuries." The ruling is likely to affect taxes on money won in lawsuits that result in punitive damages or for claims such as defamation.
To cover the cost of fighting lawsuits which can drag out for years lawyers often require clients to agree from the beginning to pay them as much as 40% of any judgment obtained.
But under the court's ruling, all of the final award will be considered as income to the plaintiff even though he may receive 60% of that amount.
"It is a fundamental rule of taxation that income is to be taxed to the person who earns it, even when it is paid at the person's direction to someone else," the Justice Department and the IRS told the high court.
In a unanimous decision, the justices reversed the rulings of two lower courts, including the U.S. 9th Circuit Court of Appeals, which had held that plaintiffs should pay taxes on the amounts they received after subtracting lawyers' fees.
John W. Banks, fired from his post with the California Department of Education, sued the agency for discrimination. Shortly after the trial began, the two sides settled and the department paid Banks $464,000. His lawyer received $150,000 of it.
However, the IRS said Banks owed income taxes on the entire $464,000, and the Supreme Court agreed in the case of Internal Revenue Service vs. Banks.
In many instances, a plaintiff can take the legal fees as an itemized deduction on his tax form. However, those itemized deductions gradually fade for high-income earners. In addition, as the court noted, taxpayers subject to the alternative minimum tax the special levy created to make sure wealthy filers could not evade taxation by claiming lots of deductions and credits are not allowed any miscellaneous itemized deductions.
Beyond that, some lawsuits that drag on for years result in a judge awarding legal fees that far exceed the amount won by the plaintiff. For example, Illinois police Officer Cynthia Spina sued her employer for sex discrimination and harassment and was awarded $300,000 in damages. But a judge awarded her lawyer $1 million in legal fees. The IRS insisted that the total amount of $1.3 million was taxable income to Spina, and she ended up "losing every penny of the award," the court was told in one brief.
In his opinion for the court, Justice Anthony M. Kennedy acknowledged the ruling could "lead to the perverse result that the plaintiff loses money by winning the suit."
Congress can change the tax laws, and while this case was pending, lawmakers did exempt from a taxpayer's gross income "attorney fees and courts costs" that arose from "a claim of unlawful discrimination."
Lawmakers said they wanted to shield from taxes legal fees that arose from federal civil rights and job discrimination claims.
In cases involving auto accidents and medical malpractice. federal tax law exempts compensation for such "personal injuries." The ruling, however, is likely to affect taxes on money won in lawsuits that result in punitive damages or for claims such as defamation.
Chief Justice William H. Rehnquist did not vote in the decision.
The money is double taxed since the Lawyer has to claim it too.
This is a tough one.
Who do I want to profit less from lawsuits, lawyers or the government?
Then that portion should be a deductible expense.
Back door tort reform!
This is almost as good a way to discourage frivolous lawsuits as "loser pays," though I would prefer "loser pays."
I haven't dug deeply enough into the facts of the case to conclude if the Supreme Court did what they should be doing. If they did just rule correctly on a bad law, then the Supreme Court did its job.
injury can arise from personal physical harm done to one person by another, such as kicking a person and breaking his or her leg. It can cost the injured person money. Let's say, 10K of hospital expenses.
Another way to harm a person is to accuse him or her of inappropriate behavior which is untrue-- libel or slander. The person winds up losing a job and it costs the person money. Let's say, for example, $10K to move from one locale to a different locale to find another job.
In each case, the out-of-pocket expenses by the injured party is $10K.
Now the SC proposes charging tax on any court-ordered monetary award categorized as defamation/slander?
In the second case, the injured party effectively pays taxes on an *expense*. The award it seems to me should be regarded as *compensation* for *expenses*, not "income."
It sounds overall as if the SC suffers from the impression that the purpose of society is income redistribution-- otherwise why exempt discrimination? Would there be any real doubt that so-called "reverse discrimination" would be effectively removed from this exemption, given the demonstrated bias of the court in this decision?
Likewise, the implicit purpose of taxing defamation seems to be, effectively, to exempt state and companies from any consequences of unintentionally or intentionally harming a person's reputation.
Injury is injury. Compensation is compensation, or should be. This is income redistribution and corporate pandering in the form of yet another wacked-out SC decision.
Maybe I misunderstand some aspect or another of the nature and effects of this decision(?)
Many of the lowlife professional plaintiffs will end up with far, far less than the shysters promised them. Some will actually OWE huge amounts of money after their "win."
The only downside is that the shysters will walk away with at least as much if not more than the crooked plaintiffs. And there are still no 1099s to the iRS reporting the monies paid to the lawyers.