Facts: William sued Swine, Inc. for unlawful age discrimination. William won the suit and was awarded $4.5 million. William’s attorney fees of $1.5 million were directly paid to the attorney. William filed taxes for the $3 million that he received, but did not include the attorney fees. The IRS audited William and asserted that the other $1.5 million awarded should have been included in William’s gross income and the attorney fees should have been expensed as miscellaneous itemized deduction and subject to the 2% floor. William challenged the IRS’s assertion and brought the issue to his attorney. The attorney believes that, due to the circumstances of the lawsuit, William is allowed to deduct all of the costs associated with the suit, including
…show more content…
William received $4.5 million in compensation awards. Attorney fees of $1.5 million were incurred during the lawsuit and paid directly to the attorney by the court. William was given the other $3 million. This is essentially the same as if William had received the entire $4.5 million, included it in his gross income, and then expensed his attorney fees of $1.5 million. Based on this logic, it is easy to conclude that William should include the entire $4.5 million in his gross …show more content…
The code goes on to clarify, “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…[IRC §62(a)(20)].” According to this exception, any costs involved in discrimination suits are deductible for AGI to the extent of the award received and includible in the tax payer’s gross income. This eliminates the double taxation that may have occurred under the previous ruling and keeps the plaintiff from being penalized any further.
An example of this IRC section is the Abraham J. George v. Commissioner Case of 2016. In this case, the IRS determined that the plaintiff was only entitled to the miscellaneous itemized deduction for legal fees incurred by his discrimination lawsuit. This assertion was rejected. Because the legal fees were incurred by the plaintiff for services provided during the unlawful discrimination lawsuit, the jury concluded that the plaintiff was entitled to above-the-line deductions under the IRC §62(a) (20) (Abraham J. George, TC Memo
William received $4.5 million in compensation awards. Attorney fees of $1.5 million were incurred during the lawsuit and paid directly to the attorney by the court. William was given the other $3 million. This is essentially the same as if William had received the entire $4.5 million, included it in his gross income, and then expensed his attorney fees of $1.5 million. Based on this logic, it is easy to conclude that William should include the entire $4.5 million in his gross …show more content…
The code goes on to clarify, “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…[IRC §62(a)(20)].” According to this exception, any costs involved in discrimination suits are deductible for AGI to the extent of the award received and includible in the tax payer’s gross income. This eliminates the double taxation that may have occurred under the previous ruling and keeps the plaintiff from being penalized any further.
An example of this IRC section is the Abraham J. George v. Commissioner Case of 2016. In this case, the IRS determined that the plaintiff was only entitled to the miscellaneous itemized deduction for legal fees incurred by his discrimination lawsuit. This assertion was rejected. Because the legal fees were incurred by the plaintiff for services provided during the unlawful discrimination lawsuit, the jury concluded that the plaintiff was entitled to above-the-line deductions under the IRC §62(a) (20) (Abraham J. George, TC Memo