Question

Anita, a cash basis taxpayer, sued her former employer for wage discrimination. Her attorney agreed to pursue the case on a contingent fee basis—the attorney would receive one-third of any settlement or court award. The parties reached a settlement, and the attorney for Anita’s former employer wrote a check payable to Anita for $320,000 and a check payable to her attorney for $160,000. Anita reasons that she and the attorney were partners in the lawsuit who shared profits two-thirds and one-third, respectively. Therefore, she includes $320,000 in her gross income. Is Anita’s analysis correct? Explain.

Answer 1

The answer is: Anita is not correct in her analysis.

Step-by-step explanation:

Anita's gross income should include the total amount of the settlement ($480,000). Anita and her lawyer are not business partners. She can deduct the $160,000 that her attorney received as a deduction from her adjusted gross income (AGI).