Academic journal article Journal of Accountancy

Contingent Attorney's Fees Taxed as Income

Academic journal article Journal of Accountancy

Contingent Attorney's Fees Taxed as Income

Article excerpt

In 1991 Eldon Kenseth was terminated by his employer after 21 years of service. He retained an attorney, under a contingent fee arrangement, and sued his employer under the 1967 Federal Age Discrimination in Employment Act. In 1993, he agreed to settle the case for $229,501. A portion of the settlement, $32,477, which represented back pay and lost wages, was paid directly to Kenseth. The balance, $197,024, was deposited in his attorney's trust account. The attorney subtracted his contingent fee of $91,800, which was 40% of the gross settlement, and issued Kenseth a check for the balance.

On his 1993 federal return, Kenseth reported the wages of $32,477 but excluded the $197,024 as personal injury damages.

During an audit, the IRS determined that the entire settlement was taxable. The service did allow Kenseth to deduct the $91,800 contingent attorney fee as a miscellaneous itemized deduction. However, because of the 2% limit on these deductions, the overall limit on total itemized deductions, and the disallowance of miscellaneous itemized deductions in computing minimum taxable income, the IRS determined a deficiency of $55,037, which included a $17,198 minimum tax liability.

Kenseth agreed that the settlement was taxable, but he argued that he should not be taxed on the attorney's contingent fee, because he did not and could not receive those funds and had no "legal" right to obtain them. The court rejected his arguments and held that the attorney fee was includable in Kenseth's income under the assignment-of-income doctrine. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.