Commissioner v. Banks, Supreme Court of the United States, Justice Kennedy, January 24, 2005 [ruling that contingency fees paid to an attorney after a jury award or settlement are taxable as part of the successful plaintiff's gross income, in part because the cases at issue arose before passage of the American Jobs Creation Act of 2004 (HR 4520), which amended the Internal Revenue Code to allow taxpayers to deduct attorney's fees and which was not retroactive]. Excerpt:
To clarify why the issue here is of any consequence for tax purposes, two preliminary observations are useful. The first concerns the general issue of deductibility. For the tax years in question the legal expenses in these cases could have been taken as miscellaneous itemized deductions subject to the ordinary requirements,26 U.S.C. Â§Â§67 —68 (2000 ed. and Supp.I),but doing so would have been of no help to respondents because of the operation of the Alternative Minimum Tax (AMT).For noncorporate individual taxpayers, the AMT establishes a tax liability floor equal to 26 percent of the taxpayer ' s "alternative minimum taxable income " ((minus specified exemptions) up to $175,000,plus 28 percent of alternative minimum taxable income over $175,000. Â§Â§55(a),(b)(2000 ed.). Alternative minimum taxable income, unlike ordinary gross income, does not allow any miscellaneous itemized deductions.Â§Â§56(b)(1)(A)(i).
Second, after these cases arose Congress enacted the American Jobs Creation Act of 2004,118 Stat.1418. Section 703 of the Act amended the Code by adding Â§62(a)(19).Id .,at 1546.The amendment allows a tax-payer, in computing adjusted gross income, to deduct "attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination." Ibid .The Act defines "unlawful discrimination " to include a number of specific federal statutes,Â§Â§62(e)(1)to (16),any federal whistle-blower statute, Â§62(e)(17), and any federal, state, or local law "providing for the enforcement of civil rights " or "regulating any aspect of the employment relationship …or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law," Â§62(e)(18).Id ., at 1547 —1548.These deductions are permissible even when the AMT applies. Had the Act been in force for the transactions now under review, these cases likely would not have arisen. The Act is not retroactive, however, so while it may cover future taxpayers in respondents ' position, it does not pertain here.
Read the full text of the opinion here [PDF]. Reported in JURIST's Paper Chase here.