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Tuesday, January 24, 2006

Cohen on Misassigning Income: The Supreme Court and Attorney Fees

Tax_analysts_251 Stephen B. Cohen (Georgetown) has published Misassigning Income:  The Supreme Court and Attorney Fees, 110 Tax Notes 355 (Jan. 23, 2006), also available on the Tax Analysts web site as Doc 2005-25325, 2006 TNT 15-29.  Here is the abstract:

Last year's Supreme Court decision in Commissioner v. Banks and Commissioner v. Banaitis distorts foundational principles, known as assignment of income law, that help identify the person who must report income for federal tax purposes. The Court held that assignment of income principles require a plaintiff to report as income the portion of a recovery paid to the plaintiff's attorney as a contingent fee. As a result, the plaintiff is taxed at excessively high rates, which may in some cases equal or exceed 100%. Taxing the plaintiff on the attorney-fee portion of a recovery also undermines the objective of federal fee-shifting statutes, which is to enable a prevailing plaintiff to act as a private attorney general by employing an attorney without cost. Although recent legislation changes the result in the future for specified categories of litigation, including a wide variety of civil rights and employment claims, there remain significant classes of cases, including nonphysical torts, physical torts with punitive damages, and environmental statutes with fee-shifting provisions, to which the recent legislation does not apply and in which plaintiffs will continue to be taxed unfairly under the Court's decision.

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