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Tax question for lawyers

1367 Views 31 Replies 13 Participants Last post by  DNeurococo
I was told recently that someone won a $500,000 law suit. It was appealed and the final settlement was reduced to about $325,000.
The person paid the lawyer about $125,000. They were told by two tax attorneys that they had to pay taxes on the original $500,000 award AND had to pay taxes themselves on the amount the lawyer got too.

I assume this must be right if two tax attorneys agree. :eek:
I assume that the lawyer will get taxed on the amount they received also.
First, isn't that double taxing the legal fees?
Second, why would they have to pay taxes on an amount they nere received?

Please inform the weak of legal and tax minded!

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This site may help some:,,id=7050,00.html#Chap2


“Allowable legal fees should be deducted on Schedule A as miscellaneous itemized deductions, unless the origin of the claim litigated is related to a Schedule C (independent contractor), or a capital transaction. This guide does not address the proper treatment of legal fees paid and deducted in taxable years prior to the year of recovery.


“Generally, individuals, as cash basis taxpayers, may deduct attorneys' fees in the year they are paid, assuming the attorneys' fees otherwise qualify as deductible. In the majority of such cases, the attorneys' fees are paid pursuant to a contingent fee arrangement once damages have been recovered. Where the ultimate recovery is excludable from gross income, either in whole or in part, the payment of contingent attorneys' fees allocable to exempt income are not deductible. IRC section 265(a)(1). The question of the timing and deductibility of attorneys' fees paid prior to resolution of the lawsuit on a noncontingent fee basis requires additional analysis that is not practical to provide in this guide. Examiners should consult with the appropriate Office of Chief Counsel for guidance.

So, I’d say that associated legal fees ARE deductible.

The general language of this site speaks of “recoveries” or “proceeds” not “awards” - - which leads me to think that the actual amount received is taxable, not the amount of the original award.

Of course, lawyers can argue about these type of things until the cows come home.

This discussion reminds me of an incident that happened to my brother. His car broke down near a repair shop. He left the car with the shop. The shop tried to rebuild the engine and screwed it up royally. The shop left his car parked on a public street, where it received many parking tickets!

Brother hired a lawyer who worked on contingency. Brother got an award. Shop owner skipped town (with bro's down payment on the engine re-build) without paying award.

Question: is brother liable to pay attorney fees based upon contingency?

Do I really have to tell you the answer? Of course he was! Attorney fees were based upon amount awarded not amount recovered! Had to pay attorney, court fees, parking tickets… and pay for a new car! Even though he didn’t receive a dime of the actual award! That's life in the big city!
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Oooooh! Bassetman! You caved!

I'll bet GB's answer won't be much different from my post #13 (for free!):

Namely, legal fees ARE deducted from the total amount. And the tax is based upon money actually received, not money originally awarded!
"Clearly the law is that Payee has to include the award in income - no question about that".

I don't doubt that they have to include the award in income. I thought the underlying question is: do they have to pay tax on the full $500K after the award had been reduced. ("They were told by two tax attorneys that they had to pay taxes on the original $500,000 award").

Now the IRS is crazy, but I can't believe that they are THAT crazy! No doubt that they want you to include the original award in your tax papers - - they are always asking for all kinds of extraneous information that is really not pertinent to the final amount that you pay - - they are nosey like that.

But I'd be very much surprised if you actually pay tax on the full amount awarded rather than the actual amount that you collect.

It is a question of semantics here, and you should question your source more closely: does "include in income" mean the final tax you pay is calculated upon the full amount with no allowance made for the reduction of the award, or allowance for the other party failing to pay their obligation? Or, does it only mean that you must make mention of the original full amount in your tax papers? (i.e. similar to gross income versus net income).

P.S. I am glad that you withdrew your offer and thus, did not reward GB for his sociopathic tendencies!
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By the way, here is a sample worksheet from the same IRS site that I mentioned.

Notice that they have a space for "original" and "final" damages. Which make me believe that they may collect the information on the original damages, but only tax you on the final damages.

Also, I would think some allowance would be made for cases in which you fail to get paid your damages - - i.e. the other party skips town and leaves no assets behind.


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That's why I included the line in my post that lawyers can argue about this "until the cows come home".

That is, the tax code is huge - - it contains tons and tons of pamphlets with complicated language in it. You can find a publication that seems to apply to the case (as I did in post #13), but someone else can find another publication that they claim supercedes your publication, or argue that the language in the first publication doesn't really apply to your particular case.

The lawyers from each side spend days arguing about what the definition of "is" is, then the judge makes a decision based upon whether or not his bunion is hurting him, and justice is done in the good old USA!

By the way, it is really amazing about the level of minuetia that they get into. I used to work doing "1065" Partnership returns for the IRS. Even did a tax-dodge for Bob Dylan. You'd come accross some odd-ball listing that you'd swear that there wouldn't be any information on - - and discover that there was a whole pamphlet on it with nine different variations on your "one in a million case".

After I got through, I would box up my work, and like in the last scene of Indiana Jones and Raiders of the Lost Ark, I would put my box in a tremendously humongous warehouse, row 132, shelf J, bin 67 - - where uncle sam could lay his hands on it if he ever needed it.

The scale from tiny minuetia to huge over-arching encompassment is staggering to behold! We have a BIG government!
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GB wrote:
“DN.......As far as your brother goes, he got ripped. He should have challenged that attorney's claim to a fee. IMO, the attorney was over-reaching and taking advantage of an individual unsophisticated as legal terminology.”

Well, this happened a long time ago. My brother was only about 19 or 20. I am his younger brother and I am now 50!
So, maybe the laws were different then. Or, maybe my brother could have protested the attorney fee, but by that time he was disgusted with the whole mess (he had spent a long time arguing with the mechanic: “when’s my car going to be ready?”, while his car was sitting out on the street gathering dust and parking tickets). After the court process, discovering his car was totaled with the engine bored out wrong - - and ticketed, and discovering the mechanic was gone, leaving no assets behind, bro was not in the mood to fight it out with a lawyer - - he just gave in.

It was kind of a cool car (in a Edsel sort of way). It was an old Dodge DeSoto with a push-button transmission, and an art-deco speedometer (little red bars would pop up for each 5 m.p.h. to form a red line going across your dashboard).

It looked something like the picture below. (Although WHY the steering wheel is on the right-hand side, I can't figure. The picture is not reversed - - the license plate reads o.k. It was the closest pic I could find).


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