Attorney fees


D

Dick Adams

Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
 
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D

D. Stussy

Dick said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
Short answer: Probably none of it, because AMT kicks in and
kills it. :-(

Long answer: Insufficient information. Isn't this going to
be one of those situations that depends on whether the
attorney takes his cut up front (which is permitted in some
appellate circuit, not permitted in others) or that the
taxpayer must recognize the gross and deduct the fees (of
which he clearly gets at least the 50% attributable to the
back wages without question, AMT notwithstanding)?

Note: Suits with awards of that size are usually multi-year.....
 
W

William P. Brown

Dick said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
Since all $375,000 of the award is taxable, all $150,000 of
the attorney fees are deductible on Schedule A.

Regards,
Bill
~~~~
Associate Professor of Accounting
Longwood University
Department of Accounting, Economics & Finance
http://www.longwood.edu/staff/wpbrown/
Opinions expressed by me are mine, not my employer's.
 
A

Arthur L. Rubin

Dick said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
All of the payment is taxable (the damages not being related
to a physical injury), so all the fees should be deductible.
Or am I missing something?
 
J

John H. Fisher

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
If this were a test, I would say ALL!!!=:) Since the
personal portion of legal fees for producing or collecting
taxable income, doing or keeping your job, or for tax advice
may be deductible on Schedule A (Form 1040) if you itemize
deductions, I would conclude that since the taxpayer is
subject to tax on both the back pay and the damages, ALL of
the income "collected" is taxable. Therefore, my conclusion
would be that ALL of the legal expense would be deductible.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
A

Arthur Kamlet

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
Is this a trick question?

Seems like all attorney fees are for production of taxable
income, so all attorney fees are deductible on schedule A
Line 22.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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G

Gene E. Utterback, EA

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
Attorney's fees for this would go on Schedule A as a
miscellaneous itemized deduction subject to the 2% floor.
The actual amount deductible would depend on all the factors
contained in the taxpayer's return.

Gene E. Utterback, EA
 
S

Shagnasty

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
The back pay would be taxable and probably the damages also.
The attorney fees would be deductible on Schedule A as a
misc deduction subject to the 2% reduction.
 
D

Drew Edmundson

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
The entire $450,000 is taxable.

$150,000 goes on Schedule A, miscellaneous, unless they are
in one of the "special" states and the fee was contingent in
which case it *may* or *may not* be 100% deducted from the
$450,000 award leaving $300,000 to go on page 1 of the 1040.
Either the Supremes or Congress really need to address this
issue.

The special states are in the fifth, sixth and eleventh
circuits. The first, third, fourth, seventh, ninth and
tenth have all ruled against the theory of an attorney lien
causing the fee to be netted against the award.

The case that started this mess is Ethel West Cotnam v.
Commr. 59-1 USTC 9200. If you use a citator you will get
quite a few cases. For example you will find Louise F.
Young, a/k/a Louise Y. Ausman, James R. Ausman v. Commr
2001-1 USTC 50,244 from the promised land.

Drew Edmundson, CPA (NC)
e-mail is my first name at nccpa dot com
 
J

Joel Berry, CPA

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
All of the attorney fees are deductible. The question I'd
ask is how are they deductible? In all of the articles I've
read on the subject, the answer is that good old tax
standby, it depends. In Texas, which is in the 5th Circuit,
the settlement income is reported net of attorney fees. In
some of the other circuits, the gross settlement is reported
as income, and the attorney fees are deducted as a
miscellaneous deduction subject to the 2% limitation on
schedule A.

Joel Berry, CPA
Sugar Land, Texas
 
D

Dave Woods, EA

Dick Adams said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
All of them. Where depends on what circuit you live in.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
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N

Nan Eklund

Personally I'd like to take !00% of the legal fees since
they were incurred in getting back pay. However, IRS would
likely insist that 50% was spent on taxable income and 50%
on non-taxable damages, i.e, not deductible.

Spoilsports!
Nan, EA in LA
 
M

Michael T Wing CPA

Drew Edmundson said:
The first, third, fourth, seventh, ninth and
tenth have all ruled against the theory of an attorney lien
causing the fee to be netted against the award.
Actually, there is a recent twist on that. The Ninth Circuit
has recently allowed the above-the-line deduction in the
state of Oregon, although it has previously denied it in (I
believe) California and Alaska. As to the other states in
the Ninth Circuit, I suppose that no one can say for sure
until cases come to bar.

The point here is that this apparently depends on the STATE
(not just the Circuit) that you have some kind of a
connection with.

Here is a conundrum that I posted in another forum:

---
Let's say that a resident of California (deduction below the
line) and a resident of Oregon (deduction above the line)
are involved in a traffic accident in the state of
Washington (deduction status unclear). Let's say that a
civil action between the parties is eventually commenced in
Washington. Both of the litigants are represented by counsel
from their respective home states, who receive temporary
permission to practice in Washington for the purpose of this
case (I believe that WA allows that).

So, if the guy from Oregon wins, would the award (to the
extent taxable) be taxed one way? But if the guy from
California wins, it would be taxed another? Would there be
different results if the case was filed in Oregon? Or
California? What matters most: Where the client is from?
Where the attorney is from? The venue of the case? Who
knows! <g>

---

So much for that "ONE nation INDIVISIBLE" stuff that we used
to chant in grade school !! <g>

MTW
 
E

Ed Zollars, CPA

Dick said:
Taxpayer sues employer for wrongful dismissal and is awarded
$225,000 in back pay and $225,000 in damages. Attorney fees
are $150,000. How much of the attorney fees is deductible?
As Dave hints, the answer is going to depend on what circuit
you are in, which state law applies and whether the attorney
was paid a contingent fee. Per the Ninth Circuit in a very
recent decision, if the answer is contingent fee in Oregon,
then *none* of the attorneys fee would be deductible --
because $150,000 of the award would not be taxable to the
plaintiff (trick question, trick answer <grin>).

The $150,000 in that case is only the attorney's income.

However, if the state were California or Alaska, then the
entire $150,000 would be deductible on Schedule A, subject
to the 2% limit--and potentially largely worthless due to AMT.
 
D

Drew Edmundson

All of the attorney fees are deductible. The question I'd
ask is how are they deductible? In all of the articles I've
read on the subject, the answer is that good old tax
standby, it depends. In Texas, which is in the 5th Circuit,
the settlement income is reported net of attorney fees.
This is only true if the fee was contingent, which it
appears to be (150,000/450,000 = 1/3).

Drew Edmundson, CPA (NC)
e-mail is my first name at nccpa dot com
 
E

Ed Zollars, CPA

Michael said:
Would there be
different results if the case was filed in Oregon? Or
California? What matters most: Where the client is from?
Where the attorney is from? The venue of the case?
From the Ninth's decision, the key issue would be the law
applicable to the attorney's rights to the award. In your
fact situation, if the case were filed and decided under the
jurisdiction of Washington courts, then Washington law would
apply. The most recent opinion strongly suggested that
Oregon law was "unique" and "unusual", implying that it's
most likely in Washington you'd end up with a below the line
deduction--though, as you note, I don't believe the Ninth
has yet told us how they feel about Washington <grin>.

Right now if you want it netted, you need Oregon law to apply.
 
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A

Arthur Kamlet

Nan Eklund said:
Personally I'd like to take !00% of the legal fees since
they were incurred in getting back pay. However, IRS would
likely insist that 50% was spent on taxable income and 50%
on non-taxable damages, i.e, not deductible.
Why do you think these particular damages would be non-taxable?

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
A

A.G. Kalman

Ed Zollars said:
Dick Adams wrote:
As Dave hints, the answer is going to depend on what circuit
you are in, which state law applies and whether the attorney
was paid a contingent fee. Per the Ninth Circuit in a very
recent decision, if the answer is contingent fee in Oregon,
then *none* of the attorneys fee would be deductible --
because $150,000 of the award would not be taxable to the
plaintiff (trick question, trick answer <grin>).

The $150,000 in that case is only the attorney's income.

However, if the state were California or Alaska, then the
entire $150,000 would be deductible on Schedule A, subject
to the 2% limit--and potentially largely worthless due to AMT.
The 9th Circuit Opinion for this case is at:
http://caselaw.findlaw.com/data2/circs/9th/0270421p.pdf
Banaitis vs Comm'r on appeal from Tax Court.
The Tax Court case is at:
http://www.ustaxcourt.gov/InOpHistoric/BANAITIS.TCM.WPD.pdf

Alan
http://taxtopics.net
 
H

Harlan Lunsford

This is only true if the fee was contingent, which it
appears to be (150,000/450,000 = 1/3).
I scratched my head for a while (didn't do any good), trying
to figure out what was the relevance of 450,000. Ah, you
were thinking maybe the lawyer got 1 /3 ? That used to be
the case, but these days, lawyers are greedier, getting
somewhere between 40 - 50% of the award.

Cheer$,
Harlan Lunsford, EA in lA
 
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D

Drew Edmundson

I scratched my head for a while (didn't do any good), trying
to figure out what was the relevance of 450,000. Ah, you
were thinking maybe the lawyer got 1 /3 ? That used to be
the case, but these days, lawyers are greedier, getting
somewhere between 40 - 50% of the award.
Well the alternative was the defendant actually paid
225,000+225,000+150,000 or 600,000 in total. In this case I
would assume the attorney was paid by the hour although I
guess there is an attorney somewhere who would agree to a
25% contingent fee.

Drew Edmundson, CPA (NC)
e-mail is my first name at nccpa dot com
 

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