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Tax question for lawyers et.al

1386 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!

Thanks
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GB, I didn't take your bet all that seriously, I didn't realize anyone else did either.
Thanks for the info! ;)
After closely reading what you posted GB.
After I talked to the attorney involved, it became more obvious what we were really talking about was whether the client had to pay the tax on the portion that the attorney got and not be able to deduct it. Not that they had to pay on the original settlement of $500,000 vs. the lower amt settled on.
At least that is how I understand it at present.
The suit involved an employer releasing medical information of their's to a newspaper.
Hmmmm....now if we can just get that business firewall to extend to the home computer....hmmmm :up: :D :D
Hehe and on Lan's work PC! :D
As I read Bassetmans info - The real issue is the alternative minimum tax - whatever the (*%&#*%%!#@ that is. From the sounds of it, the award/settlement was for emotional distress without physical injury. In such an instance, the award must be included income according to the IRS pamphlet. It sounds like the attorney fees are deductible as an itemized deduction on line 27, Schedule A. Am I correct that the amount of attorney fees that were deducted are then added back for purposes of the Alternative Minimum Tax ? I looked at my tax return and there is a line 42 called "Alternative Minimum tax - attach form 6251". I went to the IRS website and looked at Form 6251 - appears to be a nightmare ! Anybody have any background on this critter ?
Also just discovered that the Federal Courts of Appeal are divided on the issue of the exclusion/deductibility of attorney fees and that there is a case that the Supreme Court has put on its docket for the October Term. Commissioner of the Internal Revenue Service v. Sigitas J. Banaitis, No. 03-907 for anybody that is interested
I will mangle the answer until someone who can explain it comes along. ;)
You calculate your tax with the deductions, then recalculate without certain deductions and the Alternative Minimum (I believe) is somewhere in between the two. :eek:
The attorney I talked to believed this would get changed eventually (if I read him right).
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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DNeurococo said:
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.
One of the places they store these records is called "Iron Mountain". Gives you an idea of just how long they plan on holding on to those records if they're going to store them in "Iron Mountain". :D

AMT could be a problem with a large jury verdict. Most of the arguing with the IRS has to do with the allocation of the jury award. Obviously, the winning side wants to put as much as possibly under the "bodily injury" category to lessen the tax burden. Just as obviously, the IRS wants to minimize the bodily injury portion.

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.
After talking to the attorney again tonight, he has informed me that state law tends to precede federal law (my words). Ergo what is fact in CA may not be so in MN or WI :(
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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