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Washington�In a pair of cases with potential pocketbook impact on lawyers and their clients, the U.S. Supreme Court ruled last week that the contingent fee portion of lawsuit settlements and awards is taxable to the client, even if the money goes directly to the attorney. But reaction to the 8-0 decision was more muted than expected because a law passed by Congress last fall limits the ruling’s implications, and the decision won’t doom the contingent fee system, which fuels a broad range of private litigation. While the cases� Commissioner of Internal Revenue v. Banks and Commissioner of Internal Revenue v. Banaitis�were pending last fall, Congress passed a provision allowing taxpayers who win awards in employment, whistleblower and civil rights litigation not to count attorney fees and court costs as taxable income. Congress already allows this for lawyer fees in personal injury cases. In addition, Justice Anthony Kennedy, in his opinion for the court, explicitly said he was not ruling on the tax implications of other federal laws that provide attorney fees, some of which exceed the award the plaintiff receives. Costly settlements? But in other types of commercial litigation under federal and state law, experts forecast more costly settlements in light of last week’s ruling because winning plaintiffs may insist that the extra tax they have to pay be tacked onto the settlement. “Congress pre-empted the worst possible impact of [last week's] rulings,” said Jennifer Brown, legal director of Legal Momentum (formerly the NOW Legal Defense and Education Fund), which worried that a ruling against the taxpayer would discourage public interest litigation. “But we are still concerned about other cases in which the contingency fee offers the only means of access to the courts for people of ordinary means.” Jeffrey White, lawyer for the Association of Trial Lawyers of America, said, “Now, in some cases, when both sides sit down to discuss settlement, you’ll have to evaluate the tax consequences on the individual plaintiff and maybe hire a tax consultant. It will get a lot more complicated.” William Perry Pendley of Mountain States Legal Foundation, who filed a brief in the case on behalf of several public interest law firms, was disappointed that Kennedy sidestepped the tax issue as it relates to fee awards mandated by federal fee-shifting statutes. Often, Pendley said, clients of his organization and similar groups are seeking injunctive relief or small awards, not huge sums. If those clients are forced to pay taxes on the attorney fees that go to the public interest law firm, they would in effect be penalized for winning.

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