IRS Ruling Discusses Reporting Requirements for Attorneys' Fees in Opt-Out Class Action Settlement

BNA recently reported in the Class Action Litigation Report on IRS Private Letter Ruling 200625031, which ruled that court-ordered attorneys’ fees paid to class counsel are not income and not subject to the reporting requirements of § 6041 of the Internal Revenue Code. Here is an excerpt from the ruling.

This . . . private letter ruling regard[s] the information reporting requirements for attorneys' fees paid in connection with the settlement of an "opt-out" class action lawsuit under § 6041 of the Internal Revenue Code. [A] class action complaint was filed against Taxpayer (the National Class Action). The state court certified the class (Class) and appointed class counsel (Class Counsel). The National Class Action was later removed to Federal Court. Taxpayer has settled and is continuing to attempt to settle these suits on a state-by-state basis. Under the terms of the Settlement Agreement, the Taxpayer is also required to pay attorneys' fees to class counsel in an amount approved by the court . . . . This letter ruling request concerns whether the Taxpayer, under § 6041, must report on the Forms 1099 sent to Class Members a pro-rata share of the attorneys' fees paid to Class Counsel under the Settlement Agreement.

Section 6041(a) provides in part that all persons engaged in a trade or business and making payment in the course of such trade or business to another person of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income of $ 600 or more in any taxable year, shall render a true and accurate return to the Secretary. [I]n the present case, § 6041 requires the Taxpayer to report only those payments in excess of $600 includible in the Class Members' gross income under § 61. Section 61 provides generally that, except as otherwise provided by law, gross income includes all income from whatever source derived. The concept of gross income encompasses accessions to wealth, clearly realized, over which taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).

In such cases where there is no contractual agreement and someone other than the class members is liable for payment of attorneys' fees incurred in connection with such litigation, the attorneys' fees are not includible in a class member's gross income. In the instant case, attorneys' fees will not be awarded or paid to Class Counsel pursuant to any specific fee or retainer arrangement between such counsel and the Class Members, including the Class Representatives. Rather, the attorneys' fees will be paid by Taxpayer to Class Counsel in an amount approved by the court under the Settlement Agreement. As discussed above, the term "income" under § 6041 is interpreted to mean income includible in gross income under § 61. Therefore, because, in the present case, the amounts paid by Taxpayer to Class Counsel for attorneys' fees are not income to the Class Members or the Class Representatives, the payments of attorney fees are not subject to information reporting to any Class Member, including any Class Representative, under § 6041.

BNA subscribers can read the article on the ruling by clicking here.