There are various reasons. One is that in the US judgments generally don't include an award of attorneys fees unless there is a law or contract to specifically provides for it. In other words, you pay your lawyer out of your winnings. The other party doesn't.
Stu
Stuart Bronstein wrote in news:Xns9A9AA002320B7avocatstuyahoofr@130.133.1.4:
I understand that you need to pay the attorneys/lawyers, but shouldn't the award be for an amount that assures that? Isn't there aneed to recover attorney's fees in this case of (whatever it should be called, but it sounds like fraud, or at least misrepresentation or lack of performance)?
If there's no tax on the recovery, then the expense is not deductible.
Why would there be no tax on the recovery? Supposedly, one claimed a theft loss deduction - and that makes the recovery taxable.
There is no blanket deduction for legal fees. They must be business related or for the production of income. Any other legal fee, including but not limited to personal ones (e.g. divorce) is not deductible.
In my case I can't deduct the loss, so I can't make the recovery an income. But I don't think I would want to even if I could.
The loss is less 10% of your taxable income, but the recovery is taxed completely. And only the portion of legal fees over 2% of your income is deductable So the legal fees would have to exceed 12% of your income just to break even on that.
Am I doing it right?
Why would your recovery be taxed completely? See IRC section 111 - "tax benefit rule." Basically, that says that a recovery is not taxable if it's for an amount never deducted.
The "American rule" (as opposed to the English rule and perhaps the rule in other jurisdictions but I am not aware of them) is that a winning litigant will not recover an award of attorney's fees unless there is a contract or a statute the provides for it. In most situations (other than commercial or consumer transaction) there is no such law or contract.
Stu
You mean if there is no current tax on the recovery. In my example I posited that the plaintiff had paid tax on the money in a prior year. He incurs attorneys fees to recover that money. Certainly there is no tax on recovering the money he already paid tax on. But you are saying that if the taxable year and the deduction for recovery of the taxable money do not coincide, there is no deduction, while if they do coincide there is a deduction.
Stu
Stuart Bronstein wrote in news:Xns9A9CBA6EB9964avocatstuyahoofr@130.133.1.4:
Thanks, Stu.
Yes, it should be, but in most cases, it isn't.
Take it up with your legislature if you want the rules changed.
Seth
For U.S. District Court or Court of Claims, see FRCP 54. However, one has to specifically ask for costs - it's not automatic. For U.S. Tax Court, the IRC has a section which governs when cost recovery can be made.
No, I don't mean "current tax."
If a plaintiff had paid tax on the money in a prior year, then:
1) He is a cash basis taxpayer and has already received it - and therefore no deduction (no merit to the suit). OR 2) He is an accrual basis taxpayer and therefore has a deduction under IRC 162 for the cost of collection. However, that's NOT a recovery.You are aware that "recovery" applies to the receipt of something previously paid out, aren't you? One cannot recover something that one never had in the first place.
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