Taxation and State Taxation -- 2005
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Commissioner v. Banks
(U.S. Supreme Court)
Taxation of contingent fees
The Supreme Court held 1/24/05 that when a litigant’s recovery constitutes taxable income, any portion of the recovery paid to his attorney pursuant to a contingent-fee agreement is taxable. The Court reasoned that the Internal Revenue Code defines “gross income” as “all income from whatever source derived,” 26 U.S.C. § 61(a), and a taxpayer cannot exclude economic gain from his gross income by assigning it to his attorney in advance. This decision resolves a split between the Circuits on the tax treatment of contingent fees. Because contingent-fee arrangements are a standard feature in tort and other types of litigation, this case resolves an important and often-recurring issue for litigants.
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