Supreme Court Rules For IRS


W

William Brenner

On Monday, January 24, the U.S. Supreme Court ruled in favor
of the IRS position that monetary legal awards must be
considered income to the recipient in their entirety,
regardless of any attorney contingency fee arrangement.
 
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B

Bill

(e-mail address removed) (William=A0Brenner) posted:
On Monday, January 24, the U.S. Supreme
Court ruled in favor of the IRS position that
monetary legal awards must be considered
income to the recipient in their entirety,
regardless of any attorney contingency fee
arrangement.
Just curious: Does it follow that the attorney's
contingency fee, plus all expenses, would become deductible
on Schedule A? Would they be classed as an "Investment
Expense"?

Bill
 
D

Dick Adams

William Brenner said:
On Monday, January 24, the U.S. Supreme Court ruled in favor
of the IRS position that monetary legal awards must be
considered income to the recipient in their entirety,
regardless of any attorney contingency fee arrangement.
This is a painful decision that should have been avoided by
the Congress. The Supremes sans Willie noted:
(a) Two preliminary observations help clarify why this
issue is of consequence. First, taking the legal expenses
as miscellaneous itemized deductions would have been of no
help to respondents because the Alternative Minimum Tax
establishes a tax liability floor and does not allow such
deductions. Second, the American Jobs Creation Act of 2004
-- which amended the Internal Revenue Code to allow a taxpayer,
in computing adjusted gross income, to deduct attorney's fees
such as those at issue -- does not apply here because it was
passed after these cases arose and is not retroactive. Pp. 5-6.

This is reminescent of Commissioner v. Soliman where the
Congress saw the unfairness of the relevant passages of the
IRC to all taxpayers, but acted after the fact. Here they
saw the unfairness, acted before it got to the Supremes, but
didn't make it retroactive.

Maybe one day they will deal with the Alternative Minimum Tax.

Does anyone know why Willie sat this one out?
 
G

Gene E. Utterback, EA

J

Jim Foyle

Bill said:
(e-mail address removed) (William=A0Brenner) posted:
Just curious: Does it follow that the attorney's
contingency fee, plus all expenses, would become deductible
on Schedule A? Would they be classed as an "Investment
Expense"?
According to the NY Times article, the answer is yes and no.
Yes, it is deductible as an expense, but no it is not
deductible in the particular case (and presumably others
like it) because the amounts involved threw the taxpayer
into the AMT, where NO deductions are allowed.

Gotcha!

Jim
 
D

David Woods, EA, ChFC, CLU

Bill said:
(e-mail address removed) (William=A0Brenner) posted:
Just curious: Does it follow that the attorney's
contingency fee, plus all expenses, would become deductible
on Schedule A? Would they be classed as an "Investment
Expense"?
No, because it wasn't related to an investment. It's a
miscellaneous deduction.
 
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H

Harlan Lunsford

William said:
On Monday, January 24, the U.S. Supreme Court ruled in favor
of the IRS position that monetary legal awards must be
considered income to the recipient in their entirety,
regardless of any attorney contingency fee arrangement.
Well, as the local clockmaker and watch repairman said,
"It's about time!."

This should put an end to the disparity of views among the
various U S circuits' decisions. Uniformity, at last.

But a detriment to those in Alabama.

ChEAr$,
Harlan Lunsford, EA n LA
Wed 26 Jan 2005
 
A

A.G. Kalman

Bill said:
(e-mail address removed) (William=A0Brenner) posted:
Just curious: Does it follow that the attorney's
contingency fee, plus all expenses, would become deductible
on Schedule A? Would they be classed as an "Investment
Expense"?
They've always been deductible on the Schedule A as an
Itemized Misc. Deduction (not investment expense).
Unfortunately, this category of deductible expense does not
exist in the world of the AMT. That's why it is possible
for a litigant to wind up with "zip" even if they win a huge
award.
 
D

D. Stussy

William said:
On Monday, January 24, the U.S. Supreme Court ruled in favor
of the IRS position that monetary legal awards must be
considered income to the recipient in their entirety,
regardless of any attorney contingency fee arrangement.
Does that mean we're overturning certain lower court
decisions, like the 9th's for Oregon, and other similar
cases in other circuits?
 
A

Arthur L. Rubin

Bill said:
(e-mail address removed) (William=A0Brenner) posted:
Just curious: Does it follow that the attorney's
contingency fee, plus all expenses, would become deductible
on Schedule A? Would they be classed as an "Investment
Expense"?
Expenses involved in the production of income -- the type
of income depends on the type of lawsuit.
 
W

William Brenner

Without reading the opinion to determine the Honourable
Justices' reasoning, one could argue that, in principle, the
existence of a contingency fee is not really different in
terms of the gross monetary amount received by the plaintiff
than would be the case if the plaintiff received the entire
award and then paid a (non-contingency) attorney fee out of
pocket.
 
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S

Stuart Bronstein

Dick said:
Does anyone know why Willie sat this one out?
I'd guess it was a combination of his health and his vote
not being necessary for the final outcome. In a case where
there'd be a 4-4 tie without him he's more likely to
participate.

Stu
 
S

Stuart Bronstein

D. Stussy said:
Does that mean we're overturning certain lower court
decisions, like the 9th's for Oregon, and other similar
cases in other circuits?
That case specifically overruled a 9th Circuit case as well
as one other.

Stu
 
D

Drew Edmundson

This is a painful decision that should have been avoided by
the Congress. The Supremes sans Willie noted:
(a) Two preliminary observations help clarify why this
issue is of consequence. First, taking the legal expenses
as miscellaneous itemized deductions would have been of no
help to respondents because the Alternative Minimum Tax
establishes a tax liability floor and does not allow such
deductions. Second, the American Jobs Creation Act of 2004
-- which amended the Internal Revenue Code to allow a taxpayer,
in computing adjusted gross income, to deduct attorney's fees
such as those at issue -- does not apply here because it was
passed after these cases arose and is not retroactive. Pp. 5-6.

This is reminescent of Commissioner v. Soliman where the
Congress saw the unfairness of the relevant passages of the
IRC to all taxpayers, but acted after the fact. Here they
saw the unfairness, acted before it got to the Supremes, but
didn't make it retroactive.
Except they didn't really fix it. They only fixed it for
some people and left the others hanging out to dry. No fix
at all was provided if the attorney bills by the hour or in
some other way her fee isn't contingent.

Professor Maule has a great blog on this on 10-01-04 and on
1-24-05. His blog is available at:

http://mauledagain.blogspot.com/

I love this line:

"The fact that Congress chose to help only some taxpayers
and not all highlights the dangers of a Congress that
legislates by caving to lobbyists rather than acting with
wisdom and even-handed judgment."
Maybe one day they will deal with the Alternative Minimum Tax.

Does anyone know why Willie sat this one out?
I believe he sat it out because of his illness.
 
H

Harlan Lunsford

This is a painful decision that should have been avoided by
the Congress. The Supremes sans Willie noted:
(a) Two preliminary observations help clarify why this
issue is of consequence. First, taking the legal expenses
as miscellaneous itemized deductions would have been of no
help to respondents because the Alternative Minimum Tax
establishes a tax liability floor and does not allow such
deductions. Second, the American Jobs Creation Act of 2004
-- which amended the Internal Revenue Code to allow a taxpayer,
in computing adjusted gross income, to deduct attorney's fees
such as those at issue -- does not apply here because it was
passed after these cases arose and is not retroactive. Pp. 5-6.

This is reminescent of Commissioner v. Soliman where the
Congress saw the unfairness of the relevant passages of the
IRC to all taxpayers, but acted after the fact. Here they
saw the unfairness, acted before it got to the Supremes, but
didn't make it retroactive.

Maybe one day they will deal with the Alternative Minimum Tax.

Does anyone know why Willie sat this one out?
"WHO" is Willie?

Are you speaking of William Rehnquist, Chief Justice? If
so, he's been ailing here of late and my sources tell me
he's seriously considering retirement.

ChEAr$,
Harlan Lunsford, EA n LA
Thu, 27 Jan 2005
 
S

Shyster1040

Does that mean we're overturning certain lower court
decisions, like the 9th's for Oregon, and other similar
cases in other circuits?
Yes.
 
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M

MTW

Stuart said:
That case specifically overruled a 9th Circuit case as well
as one other.
Does this recent decision now stand as precedent of ALL
circuits, even though it appeared that the ~high~ justices
declined to consider issues other than those covered by the
two cases in question (9th and 6th circuits, I believe)? As
I recall, there has been much activity on this issue (and
some novel theories) in the 5th Circuit. Are they now "out
of luck" as well?

MTW
 
S

Seth Breidbart

William Brenner said:
Without reading the opinion to determine the Honourable
Justices' reasoning, one could argue that, in principle, the
existence of a contingency fee is not really different in
terms of the gross monetary amount received by the plaintiff
than would be the case if the plaintiff received the entire
award and then paid a (non-contingency) attorney fee out of
pocket.
Is the gross/net monetary amount the controlling factor?
Should it be?

Given that many judgments are negotiated after-the-fact,
would it be permissible for the winner of a $10 million
judgment (50% attorney contingency) to say "Let's negotiate
it down to $9 million: you pay me $4 million, and my
attorney $5 million"? Would that lower his gross income to
$4 million, so he doesn't get screwed by AMT?

Seth
 
S

Stuart Bronstein

MTW said:
Stuart Bronstein wrote:
Does this recent decision now stand as precedent of ALL
circuits, even though it appeared that the ~high~ justices
declined to consider issues other than those covered by the
two cases in question (9th and 6th circuits, I believe)? As
I recall, there has been much activity on this issue (and
some novel theories) in the 5th Circuit. Are they now "out
of luck" as well?
The Supreme Court makes rules for the entire country. They just
happened to take these two cases. But that does not imply that cases
from other circuits that are in conflict, are good authority.

Stu
 
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A

A.G. Kalman

MTW said:
Stuart Bronstein wrote:
Does this recent decision now stand as precedent of ALL
circuits, even though it appeared that the ~high~ justices
declined to consider issues other than those covered by the
two cases in question (9th and 6th circuits, I believe)? As
I recall, there has been much activity on this issue (and
some novel theories) in the 5th Circuit. Are they now "out
of luck" as well?

MTW
Yup!
 

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