Contingent attorney's fees.

• Author: Laffie, Lesli S.
• Position: Court Decisions

In David Raymond, 2d Cir., 1/13/04, a case of first impression for the Second Circuit, the court reversed a Vermont district court and held that an individual who settled a wrongful termination suit could not exclude from income the portion of the settlement paid directly to his attorneys under a contingency fee arrangement; instead, these amounts had to be included in income and deducted as miscellaneous itemized deductions subject to the 2%-of-acljusted-gross-income floor. Because the taxpayer was subject to the alternative minimum tax, the fees were completely nondeductible.

There is a huge conflict among the circuits on whether a directly paid contingency fee is income to the plaintiff. Courts addressing the issue have generally recognized that state law...