Number: RL32253
Title: Tax Issues in Litigation: Treatment of Judgment and Settlement Payments and Deductibility of Legal Expenses
Authors: Erika Lunder, American Law Division 
Abstract: When a party involved in a lawsuit makes a payment pursuant to a judgment or settlement agreement, the payment may be included in the recipient's income and may be deductible from the payor's income. A separate issue that also arises in litigation is whether either party may deduct the legal expenses incurred in the suit. The nature of the underlying claim is critical in determining the proper tax treatment of these payment and expenses. Portions of a payment may face different treatment depending on what each represents (e.g., replacement for lost wages, reimbursement of medical expenses, punitive damages, fines or penalties, or attorneys' fees). This report addresses the tax consequences of these payments and expenses to the payment recipient and the payor. It ends with a summary of the bills that have been introduced in the 109th Congress that would affect these consequences: H.R. 3 (Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2005), H.R. 1985 (Federal Whistleblower Protection Tax Act of 2005), H.R. 2755 (Victims Tax Fairness Act of 2005), H.R. 3076 (Freedom from Unnecessary Litigation Act of 2005), H.R. 4297 (Tax Relief Act of 2005), H.R. 4707 (Simplified USA Tax Act of 2006), S. 1565 (Tax Shelter and Tax Haven Reform Act of 2005), S. 1890 (Government Settlement Transparency Act of 2005), and S. 2020 (Tax Relief Act of 2005).
Pages: 9
Date: April 21, 2006