Good tax news for qui tam whistleblowers

On October 22,2004, President Bush signed into law H.R. 4520, the misnamed "American Jobs Creation Act of 2004," ending the double taxation of lawyers' contingent fees received by qui tam relators in False Claims Act whistleblower cases. The Act received press coverage for its enactment of a wealth of pro-business tax benefits, including "tax relief" for domestic manufacturing and other businesses, energy-related tax credits and reform of tobacco subsidies. The law also allows for itemized deduction of certain State and local sales taxes. However, most importantly for whistleblowers, a little publicized provision in section 703 of the law ends the "double taxation" of lawyers' contingent fees in civil rights, whistleblower and other types of litigation.

Until now, the IRS has required victorious civil rights and whistleblower plaintiffs, who won a damage award or relator's share, to pay taxes on the entire amount, even though a contingent fee went to the plaintiff's attorney and even though the attorney would pay taxes on that contingent fee. The government's theory was that the entire award went to the client and should be taxed to the client, no matter where a portion of the award ended up. The government also argued that if the client had hired an attorney at an hourly rate, the attorneys' fees would be paid with after-tax dollars.

This double taxation has been challenged in court with some success, resulting in disparate tax treatment depending on where you lived. Because different appellate courts had reached different interpretations of the tax law, citizens of some states were taxed on lawyers' contingent fees while citizens of some other states were not. The new law ends that geographic oddity and ends the double taxation on awards to qui tam whistleblowers under the False Claims Act. Unfortunately, the new law only applies "to fees and costs paid after the date of the enactment of this Act with respect to any judgment or settlement occurring after such date."

For the text of section 703, click here. (Note: the False Claims Act is encompassed within the law's reference to "subchapter III of chapter 37 of Title 31 of the US Code").
If you are interested in the legislative history of the Bill, click here.

Not certified by the Texas Board of Legal Specialization.

[Client Service] [False Claims Act] [Filing a Case] [Resources] [About Us] [Contact Us] [Site Map] [Home]

©2002 Kreindler & Associates All Rights Reserved

PowerAdvocates