The U.S. Supreme Court has ruled unanimously that the portion of a money judgment or settlement paid to a plaintiff's attorney under a contingent-fee agreement is income to the plaintiff.
The ruling resolves a conflict between the circuit courts of appeals, and reverses positions held in four circuits. Six circuits have held that the entire litigation recovery, including the portion paid to an attorney as a contingent fee, is income to the plaintiff.
Taking the legal expenses as miscellaneous itemized deductions would not have aided the plaintiffs, because the alternative minimum tax establishes a tax liability floor and does not allow such deductions.
The court noted that, even though the American Jobs Creation Act of 2004 amended the code to allow an above-the-line deduction for attorney's fees, it was passed after the cases arose and is not retroactive.
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