January 31, 2005

The Supreme Court ruled last week that contingent fees are taxable to the client, even if they pass through directly to the attorney. Calling the position of a client and his attorney the "quintessential principal-agent relationship," Justice Kennedy wrote for a unanimous court in determining that "as a general rule, when a litigant's recovery constitutes income, the litigant's income includes the portion of the recovery paid to the attorney as a contingent fee." The Association of Trial Lawyers of America and various public interest firms were displeased with the decision. (See full text of decision here.)