The Supreme Court is scheduled to hear oral argument next Monday (Nov. 1) in Commissioner v. Banks (No. 03-892) and Commissioner v. Banaitis (03-907). The taxpayers have filed a joint supplemental brief requesting that the Court dismiss the writ of certiorari in light of the President’s signing on Friday of the Jobs Creation Act of 2004:
On October 22, 2004, the president signed the American Jobs Creation Act of 2004. Section 703 of the Act, entitled Civil Rights Tax Relief, amends section 62(a) of the Internal Revenue Code by expressly permitting a taxpayer to subtract from his or her gross income, in arriving at adjusted gross income, the “attorneys fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination” as defined by the Act. Section 62(e) of the Internal Revenue Code, as amended by the Act, defines the term “unlawful discrimination” as an act that is unlawful under various enumerated federal, state, and local statutory provisions, as well as common law claims….
Significantly, Internal Revenue Code section 62(a), as amended by the Act, includes as “unlawful discrimination” acts which gave rise to the tax disputes in both Respondents Banks’s and Banaitis’s respective cases….
The new legislation applies to attorneys fees paid after the date of enactment with respect to any settlement or judgment occurring after its enactment. The new legislation thus does not apply to Respondent Banks’s or Banaitis’s respective tax disputes with Petitioner. However, any decision of this Court will have little or no impact on future tax disputes involving substantially the same facts. Moreover, prudential considerations, including deference to the coordinate branches, may warrant a determination that a decision as to the merits should not be reached in either of these cases. A decision on the merits in favor of Petitioner in either or both cases would lead to disparate tax consequences for federal and state discrimination claimants, depending on the date when judgment was rendered or settlement was reached with respect to their claims.
A final consideration which may warrant dismissal in each case on the ground that the writ of certiorari was improvidently granted is that Sen. Charles Grassley, the Chairman of the Senate Finance Committee, stated on the Floor of the Senate, shortly following passage of the Act by Congress, that the portion of the Act relevant to each of these cases was designed to clarify and not change existing law, and that judgments rendered or settlements reached prior to the effective date of the Act should be treated identically as judgments and settlements subject to the Act.
See the ABA Journal e-report, Singling Out Double Taxation: Measure Would Eliminate Taxes That Plaintiffs Pay on Awarded Attorney Fees:
The measure’s passage may, however, affect two cases before the U.S. Supreme Court dealing with the same issue. In IRS v. Banks, No. 03-892, and IRS v. Banaitas, No. 03-907, scheduled for argument Nov. 1, the IRS contends that the prevailing plaintiffs must pay taxes on attorney fees.
Chicago lawyer Russell R. Young, who will argue for plaintiff Joseph W. Banks II, wonders whether the court will dismiss the case. “Because the issue in Banks does not have ongoing significance for future successful plaintiffs in Mr. Banks’ position due to CRTRA, the Supreme Court may decide to dismiss the case,” Young says. “If it does not do so prior to oral argument, I anticipate that the legislation, though not directly applicable to Mr. Banks, will likely be discussed at length.”
Adds Young: “Congress’ passage of the CRTRA is confirmation that the outcome advocated by Mr. Banks—that taxpayers not be taxed on the portion of their recoveries paid directly to their attorneys—is the result supported by common sense and fairness.”
For prior TaxProf Blog coverage, see here, here, here, and here. (Thanks to Jack Bogdanski (Lewis & Clark) for the tip.)
