Legal Question in Tax Law in Alabama

Re: Determining Basis in Property

I would need further facts before I could comment in specifics. What was the lawsuit concerning that brought about the settlement. What does the settlement agreement provide in this regard or what did your litigation attorney tell you regarding tax consequences. that certainly should have been discussed?

As a general rule, unless you are being compensated for a physical injury to your person, all such awards are considered taxable by the IRS. That certainly sounds to be the case since you got a 1099 issued in your names by the payor. There are some limited exceptions to this general rule of taxation, but again, we would need more specifics before we could advise you in this regard.

I find it curious that you state the 1099 is for more than twice the value you actually received. This may be due to the fact that your litigation attorney took your case on what is called a contingency basis, so that his or her fee (perhaps 30, 40 or even 50%) came out of your recovery (and if there had been no recovery, then nothing should have been due out of your pocket personally).

However, such contingency fee arrangements do result is some inequity because the IRS may not recognize or give you a dollar for dollar deduction for the attorney fees effectively paid by you out of the gross settlement amount which was apparently reported to the IRS on the 1099s.

In other words, the IRS requires 100% inclusion on your return for the gross amount of the recovery/settlement payments (hence the 1099 you received) but may only give you a reduced "deduction" as opposed to a tax credit) for your share of your attorney's fees -- results are inequitable, effectively some double taxation as your attorney has to report his or her share of the recovery, the fees, on their income tax return), but as with oil and water, tax and logic do not necessarily mix!!

Your attorney, in our humble opinion, should have carefully gone over your tax consequences, or, as I understand most litigator do now adays, at least strongly advised you to consult with your accountant or a tax atty BEFORE you agreed to any settlement.

If neither such advice was given to you before you signed that settlement agreement and release, you may have a legal claim against your former attorney assuming two years has not yet passed since your signed that settlement agreement.

talk to your accountant further about this, and if we can be of assistance, please give us a call. Good luck, Chip