Contingency Fee Trap Under Federal Tax Law: Avoiding Hidden Settlement Obstacles and Malpractice Issues

Note: CPE credit is not offered on this program

Recording of a 90-minute CLE video webinar with Q&A

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Conducted on Wednesday, April 7, 2021

Recorded event now available

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Course Materials

This CLE course will discuss the hidden "contingency fee trap" applicable under current law through 2025, impacting most contingency fee plaintiffs. This webinar will explore how this law creates hidden obstacles to settlement and gives rise to possible malpractice issues.

Description

The U.S. Supreme Court in Commissioner v. Banks conclusively established that in certain types of contingency fee arrangement cases, the plaintiff must include the attorney fee portion of the recovery as gross income on the plaintiff's Form 1040. That is, a plaintiff may not report their recovery net of the attorney fee.

Then, under more recent statutory changes to the federal tax laws, the previous, corresponding, separate deduction for attorney fees is not available from tax year 2018 through 2025, except for particular litigation types. The combination of the Supreme Court ruling and the changes to the tax law is adverse for plaintiffs.

Including the attorney portion of the recovery in gross income without a corresponding deduction results in substantially higher federal and state income taxes for the plaintiff because the attorney fees cannot be "written off." Thus, the "contingency fee trap" leaves plaintiffs with a much lower "net" recovery. Plaintiffs may see 80 percent or more of their recovery go to taxes and attorney fees, particularly in states with high income tax rates.

Listen as our expert panel explains the contingency fee trap, its impacts, and the best tactics for mitigating it. Our panelists will also walk attendees through case studies and examples of the contingency fee trap to show how this issue bears out in real life.

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Outline

  1. Overview of current contingency fee tax treatment, origins, sunset provisions
  2. Case studies and figures with redacted practical examples of the contingency fee trap
  3. Discussion of what tactics will and will not work to sidestep the fee trap under the wording of the tax code and Commissioner v. Banks
  4. Practice tips for attorneys to provide adequate counsel on the contingency fee trap and avoid possible malpractice claims

Benefits

The panel will review these and other high priority issues:

  • What is the contingency fee trap, and how was it created?
  • Who does the contingency fee trap impact?
  • What are the real life implications and effects of the contingency fee trap?
  • How can practitioners best mitigate the contingency fee trap?

Faculty

Krause, Phillip
Phillip M. Krause, CSSC, CLMP
Managing Director of Strategic Planning
Ringler Assoc.

Mr. Krause serves as the Managing Director of Strategic Planning for Ringler Associates, the largest and oldest...  |  Read More

Wood, Robert
Robert W. (Rob) Wood
Managing Partner
Wood LLP

Mr. Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of...  |  Read More

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