Contingent Legal Fees on Settlements and Awards and the Calculation of Gross Income by Individuals for United States Federal Income Tax Purposes

2004 ◽  
Vol 2 (1) ◽  
pp. 1-12
Author(s):  
Michael P. Coyne ◽  
Richard Mason ◽  
John R. Mills
Keyword(s):  
Income Tax ◽  
Internal Revenue Service ◽  
Current Position ◽  
Significant Difference ◽  
The Supreme Court ◽  
Federal Income Tax ◽  
Gross Income ◽  
Legal Fees ◽  
Circuit Courts ◽  
Congressional Action

Lawsuits involving contingent legal fees are reasonably common. This paper focuses on the appropriateness of the inclusion in plaintiff's gross income for individual federal tax purposes of the portion of settlements going to attorneys for contingent legal fees. We present an example of the significant difference in taxes payable by a plaintiff under the two competing tax treatments. We also recap the current position of the various Circuit Courts on the issue using the opposing views of the Sixth to the Second and Seventh Circuits to frame a discussion of the issue and then discuss the treatment of securities classaction settlement proceeds that are apparently treated differently for tax purposes. The Supreme Court has recently granted certiorari in two cases and will be addressing the inclusion of contingent legal fees in gross income. We advocate that although taking the broader Sixth Circuit approach of excluding contingent attorney's fees on a joint endeavor theory would lead to more equitable results for plaintiffs, it would not necessarily be prudent judicial action and that the appropriate remedy to the situation may best be Congressional action, as the Internal Revenue Service has consistently favored inclusion.

Compensatory Damage Awards for Nonphysical Personal Injuries: The Murphy Pendulum

2008 ◽  
Vol 6 (1) ◽  
pp. 43-61
Author(s):  
Dennis J. Gaffney ◽  
Maureen H. Smith-Gaffney ◽  
Richard P. Weber ◽  
Richard O. Davis
Keyword(s):  
Income Tax ◽  
Personal Injury ◽  
Damage Awards ◽  
Federal Income Tax ◽  
Judicial Proceedings ◽  
Gross Income ◽  
Compensatory Damages ◽  
Compensatory Damage Awards

The Murphy case involves the question of whether compensatory damage awards received for nonphysical personal injury are subject to the federal income tax. Such awards had been excluded from a taxpayer's gross income since 1918, but in 1996, Congress amended I.R.C. Sec. 104(a)(2) with the intention of taxing these awards. The taxpayer (Murphy) received an award for nonphysical personal injuries after the 1996 amendment and has argued in three judicial proceedings that, despite the amendment, her award is not taxable. This paper traces the path of the Murphy case through the IRS and the courts, discusses the income tax issues raised in the various forums, and makes recommendations to clarify and improve the federal income tax treatment of compensatory damages for nonphysical personal injury.

scholarly journals THE MEANING OF “EXPENDITURE” FOR PURPOSES OF SECTION 11(A) AND (GA) OF THE INCOME TAX ACT 58 OF 1962 CSARS v Labat Africa Ltd [2011] ZASCA 157

Obiter ◽  
2021 ◽  
Vol 33 (1) ◽  
Author(s):  
SP van Zyl
Keyword(s):  
Intellectual Property ◽  
Property Rights ◽  
Intellectual Property Rights ◽  
Income Tax ◽  
Common Phenomenon ◽  
Case Discussion ◽  
The Supreme Court ◽  
Gross Income ◽  
A Company ◽  
Court Of Appeal

It is trite that a taxpayer may deduct, from his/her gross income, any expenditure or losses that were actually incurred, in the year of assessment, in relation to the taxpayer’s trade and in the production of income, provided that the expenditure is not of a capital nature. Section 11(a) does not require that the expenditure must have been incurred in the year of assessment. The courts have, however, interpreted this provision as restricting the deductibility of expenditure to expenses incurred in the year of assessment. It often happens that a taxpayer will engage in a transaction where goods are exchanged for services, or services for other services, or goods for rights. Conversely, barter, or agreements akin thereto, are still a common phenomenon in modern-day business. The question often arises whether or not payment in kind satisfies the requirement of “expenditure” actually incurred to determine the deductibility of the “expense” in terms of the general-deduction formula. The term “expenditure” is not defined in the Act. The Supreme Court of Appeal was recently called on in CSARS v Labat Africa Ltd to interpret the meaning of “expenditure” and to determine whether or not the allotment and issuing of shares in a company in exchange for intellectual property rights, satisfies the “expenditure” requirement in terms of the general deduction formula (or in terms of s 11(gA)), and if so, what value would be attached to such expenditure. This case discussion will also critically discuss the application of the judgment on modern-day barter transactions or where substitutive performance is made to satisfy an obligation.

scholarly journals Social Security Benefits Taxation: Issues And Present Status

2012 ◽  
Vol 10 (12) ◽  
pp. 659
Author(s):  
Ralph B. Fritzsch ◽  
Neal R. VanZante ◽  
Catherine Gaharan
Keyword(s):  
Social Security ◽  
Income Tax ◽  
Tax Law ◽  
Font Size ◽  
Tax Rate ◽  
Taxable Income ◽  
Current State ◽  
Federal Income Tax ◽  
Gross Income ◽  
Social Security Benefits

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoBodyText"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">Taxation of Social Security benefits was introduced in 1983 as part of a general restructuring of Social Security.<span style="mso-spacerun: yes;"> </span>As part of the 1993 Omnibus Budget Reconciliation Act, taxation of benefits was revised and expanded.<span style="mso-spacerun: yes;"> </span>Inclusion of social security benefits as part of taxable income is determined by comparing a modification of adjusted gross income and half of social security benefits to threshold amounts established in each tax law. <span style="mso-spacerun: yes;"> </span>Unlike most amounts used to determine tax, the thresholds were not subject to indexation or revision. <span style="mso-spacerun: yes;"> </span>This paper examines the current state of social security taxation in light of personal income changes, social security benefit revisions and federal income tax rate and bracket modifications that have taken place over the fourteen years since the last revision in taxation of benefits.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Simplified Procedures for Computing the Federal Income Tax

1969 ◽  
Vol 62 (1) ◽  
pp. 5-11
Author(s):  
Robert L. Morton
Keyword(s):  
Lower Limit ◽  
Income Tax ◽  
Internal Revenue Service ◽  
Taxable Income ◽  
Internal Revenue ◽  
Federal Income Tax ◽  
The Difference ◽  
Simplified Procedures

The procedure outlined by the Internal Revenue, service (IRS) for computing the amount of tax due, after the taxable income has been determined (line lld, Form 1040), requires five computational steps: (1) subtract the lower limit or the top bracket from the taxable income, (2) multiply the difference by the applicable rate, (3) add the product to a stated amount, (4) multiply the amount obtained in Step 3 by .075, and (5) add the product to the amount obtained in Step 3.

scholarly journals MP Finance Group CC (In Liquidation) v C: SARS: Adding to the financial hardship of victims of illegal transactions

2019 ◽  
Vol 19 ◽  
pp. 121-138
Author(s):  
J MP Venter ◽  
W R Uys ◽  
M C Van Dyk
Keyword(s):  
South Africa ◽  
Income Tax ◽  
South Africans ◽  
Contractual Relationship ◽  
The Supreme Court ◽  
Gross Income ◽  
The Republic ◽  
Definition Of ◽  
The Relationship ◽  
Court Of Appeal

This article analyses the interpretation of the phrase “received by, accrued to or in favour of” in the gross income definition of the Income Tax Act, as applied to illegal receipts. During the last few decades, South Africans have been victims of a number of Ponzi-type schemes. In MP Finance,1 the Supreme Court of Appeal considered whether illegal receipts received by the Krion Ponzi-type scheme should be included in gross income. After considering the relationship between the taxpayer and the fiscus, the court concluded that, as from a specified juncture, the taxpayer received the amount for its own benefit and it should therefore be included in gross income. The court recognised that the contractual relationship between the investor and the scheme (taxpayer) could in fact be void, resulting in the investor having a right to recover the investment from the taxpayer. The court did not consider whether the levying of income tax on amounts received by the operator of the scheme could infringe on the investor’s right to property espoused under the Constitution of the Republic of South Africa, 1996. It is submitted that the levying of tax does infringe on this right as it reduces the amount that could be recovered from the scheme because the original investment in the scheme is void.

scholarly journals Ochberg v CIR: No “benefit” to the benefactor

2019 ◽  
Vol 19 ◽  
pp. 25-46
Author(s):  
K Coetzee ◽  
P Van der Zwan ◽  
D Shutte ◽  
H Van Dyk ◽  
EM Stack
Keyword(s):  
Supreme Court ◽  
South African ◽  
Thematic Analysis ◽  
Income Tax ◽  
The Supreme Court ◽  
Before And After ◽  
Economic Reality ◽  
Gross Income ◽  
Definition Of ◽  
A Company

This article analyses the South African case of Ochberg v CIR, which dealt with the question whether shares issued by a company to Ochberg, who was, for all intents and purposes, the sole shareholder, in consideration for services rendered and an asset provided to the company, constituted “income” in terms of the definition of “gross income” in section 7(1) of the Income Tax Act No. 40 of 1925 (as it then applied). Ochberg’s contention was that he had received no benefit from the additional shares issued as the value of all the shares issued had been the same both before and after the issue of the shares. Accordingly, there had been no increase in his wealth and thus no income had been received. The majority decision (two of the five judges dissenting) of the Appellate Division of the Supreme Court held that the shares were “income” and had to be valued at their nominal value. The article first provides a glimpse into the life of Isaac Ochberg, who was a substantial benefactor to charitable causes. It then presents a thematic analysis of the four separate judgments set down in the case, and finally, discusses certain tax principles arising from the judgments. In conclusion, the article considers to what extent Ochberg benefited from the transaction in terms of the Haig-Simons model of taxation and the economic reality of the transaction. The lasting value of the decision is demonstrated with reference to citations of Ochberg v CIR in a number of more recent landmark cases.

scholarly journals Learning The Ropes: An Introductory Tax Return Case

2011 ◽  
Vol 7 (1) ◽  
Author(s):  
Kevin E. Flynn ◽  
Lori R. Fuller ◽  
Peter Oehlers
Keyword(s):  
Income Tax ◽  
Capital Gains ◽  
Income Taxation ◽  
Internal Revenue Service ◽  
Complex Case ◽  
The Internet ◽  
Extant Literature ◽  
Federal Income Tax ◽  
Standard Deduction ◽  
Gains And Losses

In extant literature, there are few tax return cases appearing in journals.  We present a complex case using a realistic scenario that is designed to be an introductory tax return assignment used in an individual federal income taxation course.  The case is designed to teach students how to manually prepare a federal income tax return using the actual forms and schedules prepared by the Internal Revenue Service (IRS).  This case is timely for two reasons.  1) Often tax return assignments in textbooks involve concepts that a student has yet to learn.  For example, a textbook assignment often includes itemized deductions and credits, even though these topics are typically taught towards the end of an individual tax course.  2) In addition, with the availability of information on the internet, students have greater access to solutions to textbook assignments.  This case comprehensively examines concepts typically covered in the first three or four chapters of an individual tax text: various types of income, exclusions, personal and dependency exemptions, capital gains and losses, and the standard deduction. 

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