Commissioner of Internal Revenue v. Banks (United States Supreme Court)

The issue before the Supreme Court in this case was whether income taxable to a plaintiff includes the portion of a recovery paid to the plaintiff’s lawyer as a contingency fee. NELF joined with other amici curiae to file a brief in the case to preempt an IRS assertion that, by analogy, attorneys’ fees paid by the federal government to a public interest law firm (“PILF”) under a federal fee-shifting statute (for example under 42 U.S.C. § 1988), are likewise taxable to the PILF’s client. NELF and the other amici argued that if the Supreme Court’s decision gave any credence to this position it would have a severe adverse impact on the PILFs’ ability to undertake their vital role in the judicial system of providing free legal services in matters of public interest to clients who could not otherwise afford legal representation. In its decision issued on January 24, 2005, the Supreme Court held in the Commissioner’s favor that the contingency fee amount had to be included in the plaintiff’s income. Acknowledging amici’s concerns, the Court declined to address them because, first, the matter before it involved only private contingent fee contracts and, second, the Jobs Creation Act (“Act”) of 2004, which was enacted only after all briefs in the case were filed, “redresses the concern for many, perhaps most, claims governed by fee-shifting statutes.” Specifically, § 703 of the Act amended the Internal Revenue Code by adding a section that allows a taxpayer, in computing adjusted gross income, to deduct “attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination.” While the Act defines “unlawful discrimination” very broadly, it remains to be seen whether it ameliorates all of the concerns raised in NELF’s amicus filing.