New Tax Law Cuts Benefit of Defamation Case Winners, Among Other Contingency Fee Clients

Joe Tirio photoshopped by the so-called “Illinois Integrity Fund.” to look like a robber in a mask wearing rubber gloves. Besides the mask, he is show wearing gloves so he won’t leave finger prints at the scene of the crime.

Heading over to Home depot last night I heard a piece on NPR about a change in the income tax law that I hadn’t heard before.

Winners of various contingency court cases will henceforth have to pay income taxes on the cut that goes to their attorneys.

The political angle?

Joe Tirio is suing the Illinois Integrity Fund guys for defamation, which was specifically mentioned in the story.

The new law won’t deter him because his suit is not about money.

It’s about unmasking a dirty trickster.

I’m certainly not privy to the reasoning behind the change, but I would not be surprised if this change is intended as retribution to trial attorneys for their massive contributions to Democrats.

The lawyers, however, don’t seem to lose anything but the deterrence that a lesserĀ  payout to victims will provide.


Comments

New Tax Law Cuts Benefit of Defamation Case Winners, Among Other Contingency Fee Clients — 16 Comments

  1. A plaintiff may even wind up owing money to the IRS, given that attorneys fees+expert witness and other expenses are not deductible.

    One possible way around this is to “securitize” the claim through 3rd party litigation financing

  2. A plaintiff may even wind up owing money to the IRS, given that attorneys fees+expert witness and other expenses are not deductible.

    One possible way around this is to “securitize” the claim through 3rd party litigation financing.

  3. That info can’t be right.

    How can somebody be taxed on money they never rec’d?

    contingency cases for what? Personal injury?

    How can that ever be taxed?

    Workman’s comp?

    How can that be taxed?

  4. What the new law does is eliminate deductions for attorney fees and expenses related to the suit.

    So suppose a plaintiff wins a settlement of $1,000,000 and the attorney is on contingency, taking 50%. There are also expenses in the litigation, call that $100,000.

    Plaintiff must pay federal and state taxes on the entire award.

    Thats about $420,000 taxes.
    The lawyer fee and costs add up to $600,000.

    So plaintiff loses $20,000 per million awarded in judgement.

    Still, in this case…
    Worth It.

  5. Federal, but lots of state income tax rules are tied to the Fed’s.

  6. What the new law does is eliminate deductions for attorney fees and expenses related to the suit.

    So suppose a plaintiff wins a settlement of $1,000,000 and the attorney is on contingency, taking 50%.

    There are also expenses in the litigation, call that $100,000.

    Plaintiff must pay federal and state taxes on the entire award.

    Thats about $420,000 taxes.

    The lawyer fee and costs add up to $600,000.

    So in this case, plaintiff loses $20,000 per million awarded in judgement.

    Still, in this case…
    Worth It.

  7. I don’t think this is about retribution at all.

    Just another way to take more of our money!

    They have to figure out a way to pay for all those tax cuts!

    Susan….Oh sure – it’s ok for the laws to be changed for THIS case.

    How about when YOU or someone you know is the one who is hurt?

  8. @Susan

    So, in your example, the successful party in a lawsuit pays taxes on the $600K claimed by his lawyer, and then the lawyer pays taxes on the $600K as well (less the amount paid out in expenses)?

    Doesn’t seem right, but then we’re talking IRS and the government so why should it?

  9. Anytime the government can take your money they always want to justify it!

    Let people keep their money because they will put it in the economy anyways! Most suits are not $1,000,000 but what about $100,000.

    If the Government would eliminate workers they would have so much more money!

  10. Dianne, some backstory, I am solidly on the side of reformers vs. professional political class.

    When I said “worth it” I meant it was worth it to spend money, hypothetically, to fight political corruption and bully tactics.

  11. Gofigure It is not fair, it is double taxation, yet it is the law.

    Whether $1 mil or 10% of that, the plaintiff still ends up at a loss.

    The exception is, in non medical damage awards, if the plaintiff is damaged in his work or profession.

    In the Tirio case, that is a supportable position because his livlihood is derived from salary as elected official.

    But a secondary mechanism to ensure this case has the staying power to get through to the endgame would be through third party litigation financing.

    That is when the parties putting up a great deal of the money to advance the suit are entitled to a portion of the award (if any).

    Litigation funding is valuable in cases wherein the defendants have oceans of money to deploy in the “deny, delay, and bury ’em in legal fees” gambit.

  12. These changes in the tax code only apply to certain types of contingency fee cases.

    They do apply to sexual harassment/abuse cases if a non disclosure agreement is part of the settlement – Congress wanted to discourage the use of NDAs in these type of cases.

    These changes don’t have any effect on personal injury cases.

  13. The changes do apply to non-medical personal injury damage awards.

  14. The changes don’t affect the tax treatment of awards for physical damages.

    They do affect the tax treatment of awards for emotional distress, but a lot of those awards are really dubious, so I don’t have a big problem with the changes.

  15. Economic damages due to maligned reputation fall in the classification which disallows deductions for attorney fees and expenses related to the litigation.

Leave a Reply

Your email address will not be published. Required fields are marked *