U.S. Supreme Court Weighs in on Issue of Taxability of "Contingent Attorney Fees" Portion of Plaintiff's Judgment/Settlement

The United States Supreme Court, in Commissioner v. Banks and Commissioner v. Banaitis, has now spoken on the issue of the taxability of the “contingent attorney fees” portion of a plaintiff’s judgment/settlement award. In general, the issue involved is whether such fees should be includable in a plaintiff’s gross income for tax purposes, even though payable to the plaintiff’s attorney. If includable, then the plaintiff would only be able to avoid being subject to income tax on any of these fees if they were fully deductible by the plaintiff for both regular and alternative minimum tax (AMT) purposes; often times, however, this was not the case due to the “2% of adjusted gross income” limitation on miscellaneous itemized deductions and the disallowance of miscellaneous itemized deductions altogether for AMT purposes. The United States Courts of Appeal previously had been split both as to the proper tax treatment of contingent attorney fees and the proper analysis to apply to determine such treatment.