High court to review taxes on attorney fees.

How would you explain this to your client? You won the case. The jury returned a verdict awarding damages, and the judge has entered judgment. But not only will the plaintiff walk away with nothing; he or she will owe the IRS.

The U.S. Supreme Court will deal with this unintended consequence of Congress's endless tinkering with the tax code in a pair of cases, Commissioner v. Banks and Commissioner v. Banaitis.

In 1996, Congress amended [section] 104 to make awards for nonphysical injuries taxable. The IRS position is that the entire award, including attorney fees under a contingent agreement or fee award, must be reported as income by the plaintiff and again as income by the attorney. The client is entitled to take a miscellaneous itemized deduction for the attorney fee. But such deductions are "below the line." They are deductible only to the extent they exceed 2 percent of adjusted gross income, and they are reduced again at higher incomes. If the Alternative Minimum Tax kicks in, they are not deductible at all.

As a result, the amount of the award or settlement that is allocated to attorney fees is, at least in part, taxed twice. In some instances, the plaintiff is faced with a net loss. Nevertheless, the Tax Court and most U.S. circuit courts have agreed with the IRS.

The two cases before the Supreme Court involve plaintiff-taxpayers who were represented by attorneys on a contingent fee basis. Similar and even more egregiously unfair results have occurred when courts award fees under fee-shifting statutes, such as Title VII. Most of the taxpayers victimized by this unfair tax treatment in reported cases were plaintiffs in employment discrimination actions.

ATLA will file an amicus curiae brief, prepared by the Center for Constitutional Litigation (CCL), calling on the Court to remedy this misapplication of the tax code, which threatens to undermine the civil rights statutes and other legal rights.

Arkansas tort 'reform' law in limbo

The state supreme court will consider whether an 1874 provision of the Arkansas constitution that precludes any law limiting the amount of recovery for injuries invalidates an omnibus tort "reform" statute passed last year. The plaintiffs--the Arkansas Association for Nursing Home Reform, the Arkansas AFL-CIO, the Arkansas Trial Lawyers Association, and several severely injured individuals--are represented by CCL's John Vail, with the center's Julie Schroeder and Little Rock lawyers Morgan "Chip" Welch and David Williams.

At press time, the state supreme court had not set a timetable for action on the suit, and the state attorney general is expected to mount "a vigorous defense," said Vail. Groups including the American Medical Association and the Arkansas Chamber of Commerce have already filed motions to intervene.