Discussion:Legal Fees Paid for Ongoing Settlement Negotiations
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| Revision as of 16:21, 29 May 2008 RANGERS1968 (Talk | contribs) (The major proble) ← Previous diff |
Revision as of 07:17, 30 May 2008 Taxwizard (Talk | contribs) (This law was des) Next diff → |
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| {{ForumReplyPost|UserID=RANGERS1968|Date=29 May 2008|Text=The major problem with these lawsuits is that they will almost always run over several years. What about all the other costs you have to pay? Court Costs, Fed Exs, Deposition Costs, Information Services, etc. I was under the impression that you could only include them if there was a settlement and could not exceed the amount of the settlement? So how would you deduct them in the year they are paid if the settlement is in future year? I guess the IRS need to contacted to clarify. | {{ForumReplyPost|UserID=RANGERS1968|Date=29 May 2008|Text=The major problem with these lawsuits is that they will almost always run over several years. What about all the other costs you have to pay? Court Costs, Fed Exs, Deposition Costs, Information Services, etc. I was under the impression that you could only include them if there was a settlement and could not exceed the amount of the settlement? So how would you deduct them in the year they are paid if the settlement is in future year? I guess the IRS need to contacted to clarify. | ||
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| + | {{ForumReplyPost|UserID=Taxwizard|Date=30 May 2008|Text=This law was designed to alleviate the effects of a contingent fee arrangements. Not all attorneys will advance costs; consequently, the new law really doesn't help clients who basically finance the litigation from day one. To further complicate matters, some statutes will award reimbursement of costs and/or attorney fees incurred by the plaintiff.}} | ||
Revision as of 07:17, 30 May 2008
Discussion Forum Index --> Advanced Tax Questions --> Legal Fees Paid for Ongoing Settlement Negotiations
Discussion Forum Index --> Tax Questions --> Legal Fees Paid for Ongoing Settlement Negotiations
| 8 April 2008 | |
| Client is dealing with a sexual harassment claim with a former employer. I understand the taxability matter of reporting income upon settlement. Further, in this situation, legal fees are deductible above-the-line, on Form 1040, Line 36 as "UDC."
My question is - We have $50k of legal fees paid in 2007...and the large settlement to be received by client will not be received until mid 2008. Would anyone recommend waiting for the deduction until the receipt of the settlement during 2008? That would provide the best matching of income and expense (although we know individuals are typically cash basis taxpayers) and is desired in this specific case. Any thoughts are much appreciated. | |
| 8 April 2008 | |
| It is my understanding you can only deduction the legal fees to the extent of the settlement, look @ SEC. 703. CIVIL RIGHTS TAX RELIEF of the American Jobs Creation Act of 2004 | |
| 8 April 2008 | |
| Thanks, Tex.
Yes, I agree. However, legal fees are going to much, much, much less than the settlement. The issue is some legal fees have paid in 2007 and the settlement is going to be in 2008. It's a timing/matching issue. | |
RoyDaleOne (talk|edits) said: | 8 April 2008 |
| "The claimant may take the deduction only to the extent that the claimant includes other portions of the award or settlement in income. In other words, the above-the-line deduction may not exceed the amount that the claimant included for the year."
I guess you wait until the claimant receives athe settlement. I guess this is because you may not deduct more than award. | |
| 8 April 2008 | |
| Great RoyDale - THANKS.
That is what I had advised my client in this matter. The advice is much, much appreciated. | |
| 8 April 2008 | |
| You really don't have the option of waiting until the next year to deduct attorney fees. The fees are deductible in the year paid. The new law was specifically designed to alleviate the negative tax effects of contingent attorney fee awards. In this case, the $50,000 will be deductible in 2007 on Schedule A. | |
RoyDaleOne (talk|edits) said: | 8 April 2008 |
| Riley New Code Sec 62
(20) COSTS INVOLVING DISCRIMINATION SUITS, ETC. Any deduction allowable under this chapter for attorney fees and
court costs paid by, or on behalf of, the taxpayer in connection with
any action involving a claim of unlawful discrimination (as defined
in subsection (e)) or a claim of a violation of subchapter III of
chapter 37 of title 31, United States Code or a claim made under
section 1862(b)(3)(A) of the Social Security Act (42 U.S.C.
1395y(b)(3)(A)). The preceding sentence shall not apply to any
deduction in excess of the amount includible in the taxpayer’s gross
income for the taxable year on account of a judgment or settlement
(whether by suit or agreement and whether as lump sum or periodic
payments) resulting from such claim.
| |
| 9 April 2008 | |
| I'm sure Riley is aware of the new Code sec 62! I think what JC is trying to do is take a $ for $ deduction @ a later date of settlement. Problem is that 2007 expenditures go on 2007 returns, and as such, since no 2007 settlement income the TP is limited to a Sch A deduction.
Do a search for robert Wood attorney in Google, maybe a trust? he has many good articles relating to legal fees and settlement structures | |
RANGERS1968 (talk|edits) said: | 27 May 2008 |
| I had a similar issue and this was the responce I received:
Deduction For Attorneys' Fees Generally, individuals, as cash basis taxpayers, may deduct attorneys' fees in the year they are paid, assuming the attorneys' fees otherwise qualify as deductible. In the majority of such cases, the attorneys' fees are paid pursuant to a contingent fee arrangement once damages have been recovered. Where the ultimate recovery is excludable from gross income, either in whole or in part, the payment of contingent attorneys' fees allocable to exempt income are not deductible. IRC section 265(a)(1). The question of the timing and deductibility of attorneys' fees paid prior to resolution of the lawsuit on a noncontingent fee basis requires additional analysis that is not practical to provide in this guide. Examiners should consult with the appropriate Office of Chief Counsel for guidance. | |
RoyDaleOne (talk|edits) said: | 27 May 2008 |
| The problem I see in the "new" law is now different taxpayers face with almost the same fact pattern are being treated different.
One taxpayer pays the attorney in advance of the year of the receipt of the award and gets a below the line deduction and no ATM deduction. Another taxpayer pays the attorney in the year in which the award is received is allowed an about the line deduction and an AMT deduction. The new law is better than the old law for some taxpayers but not all taxpayers. | |
RANGERS1968 (talk|edits) said: | 29 May 2008 |
| The major problem with these lawsuits is that they will almost always run over several years. What about all the other costs you have to pay? Court Costs, Fed Exs, Deposition Costs, Information Services, etc. I was under the impression that you could only include them if there was a settlement and could not exceed the amount of the settlement? So how would you deduct them in the year they are paid if the settlement is in future year? I guess the IRS need to contacted to clarify. | |
| 30 May 2008 | |
| This law was designed to alleviate the effects of a contingent fee arrangements. Not all attorneys will advance costs; consequently, the new law really doesn't help clients who basically finance the litigation from day one. To further complicate matters, some statutes will award reimbursement of costs and/or attorney fees incurred by the plaintiff. | |
