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New Federal Civil Rights Tax Relief Act Ends Double Taxation On Attorney Fee Awards
by John E. Dannenberg
On October 22, 2004, President Bush signed into law the Civil Rights Tax Relief Act (CRTRA), enacted as section 703 of the American Jobs Creation Act of 2004. While the CRTRA was intended to provide relief from double taxation of attorney fees owed prevailing plaintiffs in employment discrimination cases, a close examination of the statutory language shows that it also applies to other civil rights actions. The double taxation liability accrues first to the prevailing plaintiff who must declare the total award (i.e., damages plus attorney fees) on his or her income taxes, and later, to the attorney when they declare just the fee portion as income.
The full scope of the CRTRA is enumerated in newly added paragraph 19 to subsection (a) of section 62 of section 703 (Civil Rights Tax Relief), wherein the term unlawful discrimination" is defined in terms of applying specific civil rights statutes. Notably, for prisoner litigants, the list includes Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. § 791 or 794); Section 1977, 1979 or 1980 of the Revised Statutes (42 U.S.C. § 1981, 1983 or 1985); Section 703, 704 or 717 of the Civil Rights Act of 1964(42 U.S.C. § 2000e-1, § 2000e-3 or § 2000e-16); Section 102, 202, 302 or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. § 12112, 12132, 12182 or 12203); and any provision of federal, state or local law, or common law claims permitted under federal, state or local law providing for the enforcement of civil rights. The new Act applies to fees and costs paid after October 22, 2004 with respect to any judgment or settlement occurring after that date.
The benefits of CRTRA can be enormous, as the following example shows. An individual who under current law settles a civil rights case for $50,000, and for which the court awards $75,000 in attorney fees, presently receives as little as 13.2%, or $16,707 of the total award. This happens because the $75,000 is presently counted in the plaintiff's adjusted gross income, where it is subject to high marginal personal income tax rates. In other words, after a prevailing plaintiff recovers" their attorney fee of $75,000 and pays it to the attorney they still owe taxes on the attorney's $75,000. And when paid, the attorney owes taxes on it again.
The situation could get even worse for plaintiffs who are awarded only nominal damages. For example, if a plaintiff sued for injunctive relief and damages, winning the former but only $1 nominal damages, and his or her attorney was awarded $50,000 in fees for winning the injunctive relief, the plaintiff would owe substantial taxes on that but would only have the $1 damage award to draw from. In other words, under the previous law, a victorious plaintiff could go in the hole even though they won their case.
Under the new law, the attorney fee is passed through the plaintiff without tax liability, leaving only the attorney to declare it as personal income. In the previous example, the plaintiff would keep $44,624 of their $50,000 damage award as a result.
Plainly, the new CRTRA favorably alters the calculus of whether it is worth suing. Now, attorneys can fight hard for their clients, get paid for it, and the plaintiff doesn't suffer having to pay income taxes on his fees.
Additional Source: National Employment Lawyers Association news release.
On October 22, 2004, President Bush signed into law the Civil Rights Tax Relief Act (CRTRA), enacted as section 703 of the American Jobs Creation Act of 2004. While the CRTRA was intended to provide relief from double taxation of attorney fees owed prevailing plaintiffs in employment discrimination cases, a close examination of the statutory language shows that it also applies to other civil rights actions. The double taxation liability accrues first to the prevailing plaintiff who must declare the total award (i.e., damages plus attorney fees) on his or her income taxes, and later, to the attorney when they declare just the fee portion as income.
The full scope of the CRTRA is enumerated in newly added paragraph 19 to subsection (a) of section 62 of section 703 (Civil Rights Tax Relief), wherein the term unlawful discrimination" is defined in terms of applying specific civil rights statutes. Notably, for prisoner litigants, the list includes Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. § 791 or 794); Section 1977, 1979 or 1980 of the Revised Statutes (42 U.S.C. § 1981, 1983 or 1985); Section 703, 704 or 717 of the Civil Rights Act of 1964(42 U.S.C. § 2000e-1, § 2000e-3 or § 2000e-16); Section 102, 202, 302 or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. § 12112, 12132, 12182 or 12203); and any provision of federal, state or local law, or common law claims permitted under federal, state or local law providing for the enforcement of civil rights. The new Act applies to fees and costs paid after October 22, 2004 with respect to any judgment or settlement occurring after that date.
The benefits of CRTRA can be enormous, as the following example shows. An individual who under current law settles a civil rights case for $50,000, and for which the court awards $75,000 in attorney fees, presently receives as little as 13.2%, or $16,707 of the total award. This happens because the $75,000 is presently counted in the plaintiff's adjusted gross income, where it is subject to high marginal personal income tax rates. In other words, after a prevailing plaintiff recovers" their attorney fee of $75,000 and pays it to the attorney they still owe taxes on the attorney's $75,000. And when paid, the attorney owes taxes on it again.
The situation could get even worse for plaintiffs who are awarded only nominal damages. For example, if a plaintiff sued for injunctive relief and damages, winning the former but only $1 nominal damages, and his or her attorney was awarded $50,000 in fees for winning the injunctive relief, the plaintiff would owe substantial taxes on that but would only have the $1 damage award to draw from. In other words, under the previous law, a victorious plaintiff could go in the hole even though they won their case.
Under the new law, the attorney fee is passed through the plaintiff without tax liability, leaving only the attorney to declare it as personal income. In the previous example, the plaintiff would keep $44,624 of their $50,000 damage award as a result.
Plainly, the new CRTRA favorably alters the calculus of whether it is worth suing. Now, attorneys can fight hard for their clients, get paid for it, and the plaintiff doesn't suffer having to pay income taxes on his fees.
Additional Source: National Employment Lawyers Association news release.
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