Contingent attorney's fees paid from award: Deduction vs. exclusion

The use of contingency fee arrangements to compensate attorneys is quite common for some types of legal matters. Whether a client must include in gross income those attorney's fees has been the subject of controversy for many years. Many cases in this area have been decided recently. Taxpayers...

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Bibliographic Details
Published in:Practical Tax Strategies 2002-10, Vol.69 (4), p.222
Main Authors: Cash, L Stephen, Dickens, Thomas, Virginia Ward Vaughn
Format: Article
Language:English
Subjects:
Alternative minimum tax
Attorneys
Contingent fees
Court decisions
Federal court decisions
Fees & charges
Income taxes
Legal fees
Litigation
State court decisions
State laws
Tax court decisions
Tax deductions
Taxpayers
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Summary:The use of contingency fee arrangements to compensate attorneys is quite common for some types of legal matters. Whether a client must include in gross income those attorney's fees has been the subject of controversy for many years. Many cases in this area have been decided recently. Taxpayers who live in federal circuits that have required the inclusion of attorney's fees may be subject to penalties if they fail to include the full award in gross income. If only the net award needs to be included in the taxpayer's gross income, there is no other effect on the taxpayer's income tax return. On the other hand, if the taxpayer must report the gross award in gross income, the taxpayer normally claims a miscellaneous itemized deduction for the contingent attorney's fees. Regrettably, there are tax disadvantages to taxpayers of this treatment of attorney's fees:
ISSN:1523-6250