Misassigning Income: The Supreme Court and Attorneys' Fees

Abstract:     
This past term's Supreme Court decision in Commissioner v. Banks and Commissioner v. Banaitis distorts foundational principles, known as assignment of income law, which help identify the person who must report income for federal tax purposes. The Court held that assignment of income principles requires a plaintiff to report as income the portion of a recovery paid to the plaintiff's attorney as a contingent fee. As a result, the plaintiff is taxed at excessively high rates, which may in some cases equal or exceed a confiscatory 100 percent. Taxing the plaintiff on the attorney-fee portion of a recovery also undermines the objective of federal fee-shifting statutes, which is to enable a prevailing plaintiff to act as a private attorney general by employing an attorney without cost. Although recent legislation changes the result in the future for specified categories of litigation, including a wide variety of civil rights and employment claims, there remain significant classes of cases, including nonphysical torts, physical torts with punitive damages, and environmental statutes with fee-shifting provisions, to which this recent legislation does not apply and in which plaintiffs will continue to be taxed unfairly under the Court's decision.

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