How the Income Tax Undermines Civil Rights Law

Abstract

Federal statutes entitle prevailing plaintiff in civil rights litigation to recover attorney's fees from defendant. The recovery of attorney's fees under these so-called constitutes a deliberate departure from usual American rule that each litigant must bear her own legal costs. A civil rights plaintiff acts not just for herself alone but also as a attorney general, vindicating national policy. The fee-shifting provisions enable plaintiff who cannot pay a private attorney, and whose potential recovery is not sufficient for a contingency fee arrangement, to perform this private attorney general function. This objective has been undermined by recent tax decisions concerning taxation of employment discrimination plaintiffs. Under these decisions, a civil rights plaintiff must report her entire recovery as income. However, attorney's fees the cost of producing income are not fully deductible under regular tax and are not deductible at all under alternative minimum tax. As a result, plaintiff's is overstated and overtaxed. The tax law should permit a civil rights plaintiff either to deduct fully or to exclude recovery of attorney's fees. A full deduction or exclusion would provide a more accurate measure of plaintiff's and also preserve purpose of fee-shifting provisions.