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

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Course Details

Course Information

smart_display Format
On-Demand
signal_cellular_alt Difficulty Level
work Practice Area
Personal Injury and Med Mal

Date & Time

event Date
Wednesday, March 22, 2023
schedule Time
1:00 p.m. ET./10:00 a.m. PT
timer Program Length
90 minutes

Credit Information

This 90-minute webinar is eligible in most states for 1.5 CLE credits.

$197.00

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.

Faculty

Phillip M. Krause

Principal

Krause Capital, Inc

Mr. Krause is the President of Krause Capital, Inc. and Structured, LLC. He is a registered representative of FINRA and a registered investment advisor with the SEC. Mr. Krause consults on issues related to resolving mass torts, class actions and complex insurance claims. He is an expert on 468B Qualified Settlement Fund administration, structured settlement annuities and Trust administration. Recently, Mr. Krause has consulted on the NFL Concussion Settlement and the Dr. Larry Nassar – Michigan State University Settlement, where he provided advice on how to allocate settlement proceeds to claimants seeking to protect both their government benefits eligibility and settlement proceeds from future creditors.

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Robert W. Wood

Managing Partner

Wood LLP, LLP

Mr. Wood handles a wide range of tax planning and tax controversy matters. He also serves as an expert witness on tax issues in legal disputes. Mr. Wood is best known for his expertise advising plaintiffs, defendants, and lawyers on the tax treatment of legal settlements and judgments. He authored the leading book on this topic, Taxation of Damage Awards & Settlement Payments (5th Ed 2021), as well as the Bloomberg Tax Management Portfolio, Tax Aspects of Settlements and Judgments (522).

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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.

Outline

Overview of current contingency fee tax treatment, origins, sunset provisions
Case studies and figures with redacted practical examples of the contingency fee trap
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
Practice tips for attorneys to provide adequate counsel on the contingency fee trap and avoid possible malpractice claims