With the backing of a rare coalition of business and civil rights groups, the United States Senate passed the Civil Rights Tax Relief Act to end the "double taxation" of attorneys' fees applied to individuals who win or settle employment discrimination and related cases. The provision was included in the American Jobs Creation Act of 2004, which was passed by the House of Representatives earlier this month, and is scheduled to be signed by President George W. Bush soon.
"This is a gigantic win for employees who have suffered discrimination in the workplace," said Bruce A. Fredrickson, a Washington, D.C. employment discrimination attorney and Vice-President of Public Policy of the National Employment Lawyers Association ("NELA"). "We are thrilled that Congress saw the wisdom of relieving individuals from having to pay taxes on fees that are paid to their attorneys, where the attorneys are already taxed on those same fees." In addition to NELA, the bill was also supported by the U.S. Chamber of Commerce, the AARP, the Society for Human Resources Management, and a broad coalition of groups.
According to the New York Law Journal, until now, the IRS required a victorious civil rights or other plaintiff who won, for example, a damage award of $100,000 to pay taxes on the entire amount, even though a contingent fee of $30,000 went to the plaintiff's attorney, and even though the attorney would pay taxes on that $30,000. The government's theory was that the entire award went to the client and should be taxed to the client, no matter where a chunk of the award ended up.
The Civil Rights Tax Relief Act was sponsored by Representative Deborah Pryce (ROH), and by Senator Susan Collins (R-ME). "Representative Pryce and Senator Collins have been huge advocates for this change from the start, and the bill has also been championed in the Senate by Senator Charles Grassley and Senator Jeff Bingaman. The civil rights and business communities are extremely grateful for their leadership on this critical issue of tax fairness," said Mr. Fredrickson.
The new law will allow individuals who settle any discrimination case or win in court to deduct the fees paid to their attorneys. The law will not change the tax paid by attorneys. Prior to the new law, the Internal Revenue Service took the position that those individuals should be taxed not only on the amount that they had received as compensation for unlawful discrimination, but also on the fees paid to their attorneys. Employees who had won their discrimination cases sometimes received tax bills that actually eclipsed their award.
The Civil Rights Tax Relief Act was passed as section 703 of H.R. 4520, a much larger bill entitled the American Jobs Creation Act of 2004.