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CT Client Taxed for Attorney Fee: 2nd Circuit District Court Sides with IRS
[Ed. Note: Thanks are due to Henry F. Murray, plaintiff's co-counsel in the CT case described above, for referring me to coverage of this issue in the FY 2002 National Taxpayer Advocate's Annual Report to Congress. See the sidebar on this page for that report's own list of highlight items. The relevant report section (Section 2, Legislative Recommendations) can be viewed or downloaded in PDF format from www.irs.gov/advocate/article/0,,id=107685,00.html on the IRS Web site; see pages 160-171. Murray observes that a recent 6th Circuit case (Banks vs. Commissioner of Internal Revenue, 2003 FED App. 0347P (6th Cir.) No. 18097-97, decided 9/30/2003), adds yet another bit of complexity to the case law on this issue.]
Uncertainty over who has to pay income tax on a lawyer's fee has long vexed employment litigation. [Ed. note: As explained below, this same issue also applies to other forms of "nonphysical personal injury."] But U.S. District Senior Judge Peter C. Dorsey has concluded that both client and lawyer must fork over income tax on the attorney's fee component of an award or settlement.
Even if the employer, by contract, must write the check to the lawyer directly, Dorsey's seven-page analysis in Parmanand v. Capewell Components, LLC, determines that payment is really being made first to the client, and is also taxable as client income.
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