The Catholic University of America

Summary of Federal Laws

Employment

Equal Employment Opportunity

Civil Rights Tax Relief Act of 2004

Section 703 of the American Jobs Creation Act of 2004

The new Civil Rights Tax Relief Act, (part of The American Jobs Creation Act of 2004), signed into law on October 22, 2004 allows individuals who settle or win employment discrimination cases to deduct the fees and assorted costs paid to their attorneys. This does away with the "double taxation" of attorney's fees (i.e. both plaintiff and attorney paid taxes on attorneys fees.)

Under the new law, an individual makes an above the line deduction of attorneys fees and costs incurred in connection with a claim of unlawful discrimination, so that the amount is not included in the taxpayer's adjusted gross income. The law does not change the tax paid by the attorneys. The act applies to fees and costs occurring after October 22, 2004 with respect to any judgment or settlement after that date.

Related Supreme Court Case
 
Commissioner of Internal Revenue v. Banks, No. 03-892 (Jan. 24, 2005)
In a case decided by the Supreme Court on facts and circumstances that arose before passage of the above law, the Court looked at the following issue: "The question in these consolidated cases is whether the portion of a money judgment or settlement paid to a plaintiff's attorney under a contingent-fee agreement is income to the plaintiff under the Internal Revenue Code, 26 U.S.C. § 1 et seq." and decided as follows: "We hold that, as a general rule, when a litigant's recovery constitutes income, the litigant's income includes the portion of the recovery paid to the attorney as a contingent fee." The Court noted that the amendment added by the American Jobs Creation Act redresses the concerns raised by claims governed by fee shifting statutes.
 
 
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