Update to the Federal Income Tax Treatment of Contingent Legal Fees in Personal Injury Cases

• Publication year: 2002
• Pages: 77
• Citation: Vol. 31 No. 2 Pg. 77

31 Colo.Law. 77 Colorado Lawyer 2002.

2002, March, Pg. 77. Update to The Federal Income Tax Treatment of Contingent Legal Fees in Personal Injury Cases

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77

Vol. 31, No. 2, Pg. 77

The Colorado Lawyer
March 2002
Vol. 31, No. 3 [Page 77]

Specialty Law Columns
Tax Tips
Update to "The Federal Income Tax Treatment of Contingent Legal Fees in Personal Injury Cases"
by James Serven

James Serven has provided the following update to his article, "The Federal Income Tax Treatment of Contingent Legal Fees in Personal Injury Cases," which was printed in 30 The Colorado Lawyer 81 (March 2001). James Serven Denver, is an Adjunct Professor at the University of Denver College of Law, and Vice-President and General Counsel of National Properties Group Corporation?(303) 534-6000

The U.S. Court of Appeals for the Tenth Circuit has issued its opinion in Hukkanen-Campbell v. Commissioner, No 00-9030, 12/19/01, rejecting the taxpayer's contention that she could net her contingent legal fees against her Title VII recovery and simply report the net recovery in gross income. In so holding, the Tenth Circuit has adopted the clear majority view now shared by the Tax Court and the Third, Fourth, Seventh, Ninth, and Federal Circuits. Under this view, the plaintiff's entire recovery must be reported in full?including any attorney fees awarded to the plaintiff as the "prevailing party" under applicable federal fee-shifting statutes, or otherwise paid by a settling defendant. Any contingent fees earned by the attorney must be claimed by the plaintiff as a below-the-line miscellaneous itemized deduction.

As discussed in the March 2001 article, such deductions carry with them several disadvantages, including that they are subject to the 2 percent-of-Adjusted Gross Income floor of Code § 67 and the itemized deduction limitation of Code § 68 for purposes of the regular tax. More important, they are not deductible at all for purposes of the Alternative Minimum Tax ("AMT") ?a result that can have severe adverse consequences.

Judge McKay's opinion for the unanimous panel in Hukkanen-Campbell was surprisingly brief, given the controversial nature of the issue. Hukkanen-Campbell had urged the court to adopt a uniform standard that contingent fee payments made by the defendant directly to the plaintiff's attorney should not be taxable to the plaintiff. The court declined, concluding:

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