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The Eagle Eats First

By Ronald G. Dunn
April 06, 2004

Experienced employment lawyers know that getting both sides to say “yes” to settlement is a complicated task. The 1996 amendments to the tax code eliminating the previous exclusion of emotional harm damages from taxable income complicated the already difficult question of how to maximize the value of limited dollars to encourage settlement. With fewer options to maximize the value of limited settlement dollars, ultimately the tax consequence of the settlement becomes everyone's problem.

Until recently, it was widely believed in New York that attorneys' fees could be paid separately to the plaintiff's lawyer pursuant to a contingency fee agreement as a way of minimizing the plaintiff's tax liability. A recent decision by the Second Circuit casts considerable doubt on the continued viability of that approach. Since the complete labor lawyer must now dabble in tax advice, a few tips about understanding how the IRS interprets the tax code are in order.

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