Facts of the Case

Sigitas Banaitis and John Banks separately argued to the U.S. Tax Court that contingency fees paid to lawyers could be deducted from taxable gross income. The court disagreed and ruled for the Internal Revenue Service. The IRS said Banaitis and Banks owed taxes on contingency fees. Banaitis appealed to the Ninth Circuit Court of Appeals, which ruled that under Oregon law 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' cases.

Question

Does a taxpayer's gross income from litigation proceeds include contingency fees paid to lawyers?

Conclusion

Yes. In a unanimous, 8-0 opinion delivered by Justice Anthony Kennedy, the Court held that if a litigant's recovery constituted income, the litigant's income included the contingency fee paid to his or her lawyer. The Court held that an economic gain assigned in advance to another party - as in a contingency-fee agreement - could not be excluded from gross income.