CIR v. Banks, 543 U.S. 426, 125 S. Ct. 826 (2005)

In these consolidated cases, John W. Banks, II and Sigitas J. Banaitis failed to report as income portions of a settlement (in Banks’s case) and a favorable judgment (in Banaitis’s case) that were paid to their attorneys. The United States Supreme Court held that when a litigant’s recovery constitutes income, the income includes that portion of the recovery paid to the attorney as a contingent fee. The Court observed that the American Jobs Creation Act of 2004, which was enacted after these cases arose, allows a taxpayer to deduct attorney’s fees and court costs in connection with actions involving employment rights. “Had the Act been in force for the transactions now under review, these cases likely would not have arisen. The Act is not retroactive, however, so while it may cover future taxpayers in respondents’ position, it does not pertain here.”