Case Study: Quit Vs. Case

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Facts: Joshua got injured due to the fact that Zev was negligent. He consulted with Jack, an attorney, to explore bringing a lawsuit. Jack accepted the case on a standard contingency basis, which called for him to receive one-third of any recovery. Zev’s insurance company agreed to pay Joshua $900,000 for his medical expenses and his pain and suffering. As per the agreement between Jack and Joshua, the $900,000 was paid to Jack as Joshua’s attorney. Upon receipt of the funds Jack immediately paid Joshua $600,000, keeping $300,000 for himself. Question: Prior research revealed that the settlement was taxable income to Joshua. How should Joshua report/deduct Jack’s $300,000 legal fee? Specifically he would like to deduct it other than as a miscellaneous itemized deduction, which would give him no tax benefit due to the Alternative Minimum Tax. Discussion and conclusion: Since Joshua’s damage award is considered part of his gross income, the concern is whether he can deduct the contingency- based attorneys fees. If the damage incurred in connection with a trade or business, than he would be able to deduct this expense on schedule C, assuming he is self-employed. Or he can deduct it as a miscellaneous itemized deduction; due to the fact that he is subject to the…show more content…
Commissioner case. Banaitis and Banks argued individually to the U.S. Tax Court that contingency fees paid to lawyers should be deducted from taxable gross income. The court ruled and disagreed. The IRS said that Banaitis and Banks owed taxes on contingency fees. Banaitis appealed to the Ninth Circuit Court of Appeals, which ruled that contingency fees could not be taxed as income. Banks appealed to the Sixth Circuit Court of Appeals, which ruled contingency fees were never taxable income. Other federal appeals courts ruled to the contrary. The U.S. Supreme Court consolidated Banaitis and Banks

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