Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax
This answer was rated:

What law provides that attorneys fees that settlements of Sox

and Dodd frank whistleblower claims...
What law provides that attorneys fees that settlements of Sox and Dodd frank whistleblower claims are tax deductible above the line? Is the remaining settlement amount taxed as ordinary income?
Show More
Show Less
Ask Your Own Tax Question
Answered in 57 minutes by:
9/28/2013
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 779
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
Verified

Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

 

Unfortunately, the above-the-line deduction for attorney fees does not apply to settlements under Dodd-Franks or SOX. It only applies to reprisal law suits for employment-related reprisal suits. Gary Aguirre wrote a good article on this in The Whistleblower on April 11, 2013. In it, he said:

 

"Whistleblowers who receive an award from the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC) for disclosing violations of securities or commodities laws are subject to uniquely unfair tax liability. They pay income tax on their entire award, including the portion paid to their attorney under a contingent fee agreement. This is in addition to the income tax their attorneys pay on the same fee.

 

An example best illustrates the point: Assume a whistleblower receives a $500,000 award from the SEC pursuant to the Dodd-Frank Act. The net award is about $350,000 after the whistleblower pays his attorney $150,000 pursuant to a contingent fee agreement. One might expect the whistleblower to be taxed on the net amount: $350,000. Wrong, the whistleblower would be taxed on the entire amount of the award ($500,000), since taxes would likely be computed using the federal Alternative Minimum Tax (AMT) of 28%, which would include the $150,000 of attorney's fees. It gets worse when the state, e.g., New York, has its own AMT. In this scenario, the unhappy whistleblower could easily net only one-third of his $500,000 award: $166,000.

 

 

This problem originates with Commissioner v. Banks, 543 U.S. 426 (2005), where the Supreme Court held the plaintiff's entire recovery of economic damages in a civil rights case was taxable income, including the portion paid to the plaintiff's attorney under a contingent fee agreement. Although the amount paid as attorney's fees may be claimed as an itemized deduction (Campbell v. Commissioner, 134 T.C. 20 (2010)), it is still subject to the AMT (28%) and to the 2% floor on miscellaneous deductions. Banks had disastrous effects for the False Claims Act (FCA) whistleblower in Campbell. In addition to holding that the attorney's fees were taxable to the whistleblower, the tax court tacked on a 20% penalty for trying to circumvent the law. After the events in Campbell, but prior to the decision, Congress enacted an above-the-line exclusion for attorney's fees for FCA whistleblowers (26 USC § 62(a)(20)), but the Campbell Court declined to apply that statute retroactively.

 

In October 2004, the Civil Rights Tax Relief Act eliminated double taxation in whistleblower reprisal cases, discrimination cases and other employment-related cases. The statute permits an above-the-line exclusion of attorney's fees, meaning the fees are not taxable to the plaintiff. Accordingly, whistleblowers in reprisal cases ­- ­­including reprisal cases under the DFA - only pay taxes on their net recovery. Likewise, a FCA whistleblower only pays taxes on his net recovery (26 USC § 62(a)(20)). The same is true for a whistleblower who receives an award from the IRS (26 USC § 62(a)(20)). However, since no statutory exclusion applies to the attorney's fees paid by a whistleblower who obtains an award from the SEC or CFTC under Dodd-Frank, he must go the itemized deduction route, which means the 2% floor and the 28% AMT.

 

There is no apparent reason for taxing the attorneys' fees paid by whistleblowers under Dodd-Frank while excluding such fees from gross income for whistleblowers who obtained an award under the FCA or the IRS's whistleblower program, the model used by Dodd-Frank."

 

So unless your settlement under SOX or DFA is for employment-related reprisals, you may only deduct the legal fees as a miscellaneous itemized deduction, subject to the 2% AGI limitation. And, if the settlement is large enough, and you wind up in AMT, you will wind up paying tax on the entire settlement.

 

I wish I had a better answer! If you have any questions, please ask away! I will be happy to answer. If you have found my answer helpful, please rate me highly! I would appreciate that!

 

Again, thanks! Have a great weekend!

 

Roger

Ask Your Own Tax Question
Customer reply replied 4 years ago
The settlement for the whistleblower claim is for retaliation and termination of my employment because of blowing this whistle-reprisal, so I think it's deductible above the line. Thanks , good answer

You are correct. If you were terminated, then the provisions of the Civil Rights Tax Relief Act of 2004 do apply do you. You will only be taxed on your net settlement (per IRC §62(a)(20).

 

If you have any more questions, please let me know. Again, if you have found this helpful, please don't forget to rate me, as this is how the question is closed.

 

Thanks! Have a great weekend!

 

Roger

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 779
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
Verified
taxmanrog and 87 other Tax Specialists are ready to help you
Ask your own question now
Ask taxmanrog Your Own Question
taxmanrog
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 779
779 Satisfied Customers
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.

taxmanrog is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,310 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,695 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
If lease payments are being taken as a tax deduction can the
If lease payments are being taken as a tax deduction can the mileage method be used to account for other expenses? Or are you required to use actual expenses?… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
Dose mean can not deduct state income taxes only or dose it
dose mean can not deduct state income taxes only or dose it includes property taxes too … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
Are the following items tax deductible with regards to an SBA loan?
Are the following items tax deductible with regards ***** ***** SBA loan ? 1. SBA guaranty fee 2. packaging fee 3. Environmental expense ( towards environmental assessment ) 4. Appraisal fee What docu… read more
Charles Greiner
Charles Greiner
Owner
Bachelor's Degree
2,436 satisfied customers
Under current law a 100,000 taxable income pays $10,365 plus
Under current law a 100,000 taxable income pays $10,365 plus 25% of the amount exceeding $79,400 i.e. about $16,000. Under tax reform will the tax be $25,000? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Is the house or taxes deductible for him. How does it affect
Is the house or taxes deductible for him. How does it affect his taxes. How can the house be in both our names, without making me an equal partner.… read more
Fred Rook
Fred Rook
Corporate Controller
BSBA
32 satisfied customers
Form 1120, cash basis. If Taxes paid to IRS are deductible,
Form 1120, cash basis. If Taxes paid to IRS are deductible, are refunds for overpayment the equivalent of income?… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
736 satisfied customers
Trying to decide between pre-tax and post tax deduction for
trying to decide between pre-tax and post tax deduction for my health care coverage … read more
abci168
abci168
Principal
27 satisfied customers
I'm looking for help with tax deductions. I will be
I will be receiving a large lump sum this year. I want to know if there is a limit to how much state tax I can deduct for federal filing? … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
I have a question regarding the ordinary income tax. If the
Hello, I have a question regarding the ordinary income tax. If the ordinary income tax due is negative does that apply anywhere? This pertains to the sale of an S corp .business. … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
Two questions on federal tax deductibility: 1. We personally
Two questions on federal tax deductibility: 1. We personally paid legal fees for our manufacturer C Corp. The fees were for assistance in preparing a Research & Development tax credit application. Can… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
You may recall that tax deductions are only deductible by
You may recall that tax deductions are only deductible by the legislative grace of Congress. After this lesson, you might have realized that Congress was pretty generous with the types of business exp… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,483 satisfied customers
Have a question about tax deductions my 401K withdrawals
Have a question about tax deductions my 401K withdrawals since I may need to a distribution of a large amount? … read more
abci168
abci168
Principal
27 satisfied customers
Are medical equipment purchesed tax deductable. I have been
I have been prescribed a portable oxygen generator is this equipment deductable … read more
abci168
abci168
Principal
27 satisfied customers
I would like clarification on the IRS tax deductions and a
I would like clarification on the IRS tax deductions and a rental property I purchased recently. … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
Is the Section199 tax deduction available to a dentist who
Is the Section199 tax deduction available to a dentist who will be fabricating dental appliances?… read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,220 satisfied customers
I have a question regarding business tax deductions for
I have a question regarding business tax deductions for restaurant meals with clients?What percentage of the meal and gratuity are tax deductible and is alcohol also included in the amount which may b… read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,220 satisfied customers
I am not filing schedule A for itemized deductions, but
I am not filing schedule A for itemized deductions, but would like to include sales tax in 1040 Form. Where do I put it? … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
If I prepare an itemized deduction, can I also deduct the
If I prepare an itemized deduction, can I also deduct the standard deduction? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x