Business Law

Business Law News 2020, ISSUE 1

Workarounds for Plaintiffs & Lawyers Under New Tax Law

Robert W. Wood

Robert W. Wood practices law with Wood LLP ( and is the author of Taxation of Damage Awards and Settlement Payments and other books available at This discussion is not intended as legal advice.

You are a plaintiff in a lawsuit and just settled your case for $1,000,000. Your lawyer takes 40%, $400,000, leaving you the balance. Most plaintiffs assume their worst-case tax exposure would be paying tax on $600,000. But today, you could pay taxes on the full $1,000,000. Welcome to the crazy way legal fees are taxed.

In Commissioner v. Banks,1 the Supreme Court held that plaintiffs in contingent fee cases must generally recognize income equal to 100% of their recoveries. This is so even if the lawyer is paid directly by the defendant, and even if the plaintiff receives only a net settlement after fees. This harsh tax rule usually means plaintiffs must figure a way to deduct those fees.2

Join CLA to access this page


Log in

Forgot Password

Enter the email associated with you account. You will then receive a link in your inbox to reset your password.

Personal Information

Select Section(s)

CLA Membership is $99 and includes one section. Additional sections are $99 each.