How the Income Tax Undermines Civil Rights Law

Abstract:     
Federal statutes entitle the prevailing plaintiff in civil rights litigation to recover attorney's fees from the defendant. The recovery of attorney's fees under these so-called "fee-shifting provisions" constitutes a deliberate departure from the usual American rule that each litigant must bear her own legal costs. A civil rights plaintiff acts not just for herself alone but also as a "private attorney general," vindicating national policy. The fee-shifting provisions enable the plaintiff who cannot pay a private attorney, and whose potential recovery is not sufficient for a contingency fee arrangement, to perform this private attorney general function. This objective has been undermined by recent income tax decisions concerning the taxation of employment discrimination plaintiffs. Under these decisions, a civil rights plaintiff must report her entire recovery as income. However, the attorney's fees "the cost of producing the income" are not fully deductible under the regular tax and are not deductible at all under the alternative minimum tax. As a result, the plaintiff's income is overstated and overtaxed. The tax law should permit a civil rights plaintiff either to deduct fully or to exclude the recovery of attorney's fees. A full deduction or exclusion would provide a more accurate measure of the plaintiff's income and also preserve the purpose of the fee-shifting provisions.

Number of Pages in PDF File: 27

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