The opinion of the court was delivered by: James Robertson, United States District Judge.
After a jury awarded him compensatory damages for retaliation in his employment discrimination action against USAID, Melvyn Porter filed a petition for equitable relief. He included a request for attorneys' fees in that petition and asked that I "gross up" the fee award to cover any tax liability a fee award might entail. I declined to rule on the attorneys' fee request while considering Porter's prayer for retroactive promotion, back pay, and injunctive relief, and I declined to decide the tax "gross up" question, finding the issue not then ripe for decision. With respect to the tax question, I said (hope once again prevailing over experience),
Given the recent publicity on this issue... and the injustice of the result of the [IRS] position, it is hard to believe that Congress will not correct the problem before long. If it does not, I will consider whether there is some way of delinking the payment of attorneys fees from the plaintiff himself, and, if there is none, I will give further consideration to a"grossed up" award.
I have now granted plaintiff's attorneys' fee petition (by memorandum order filed today). Congress has not acted. Porter has renewed his request for an order requiring USAID to indemnify him against any tax consequences of the attorneys' fee award, or, in the alternative,"grossing up" the attorneys' fee award or"disconnecting" the fee from the plaintiff himself. The petition also asks that I retain jurisdiction so that I can address the indemnification question if, and when, the need arises.
Porter sued the United States Agency for International Development ("USAID") under Title VII of the Civil Rights act of 1964, alleging that USAID had discriminated and retaliated against him when it failed to select him for three separate positions at the GS-15 level. He initiated this litigation pro se. I urged him to obtain counsel and granted him an extension of time to do so. Through the Washington Lawyer's Committee for Civil Rights and Urban Affairs ("WLC"), plaintiff obtained assistance from Covington & Burling ("Covington") in February 2001. Covington and WLC then responded to USAID's first partial dispositive motion, which I granted in part and denied in part. Covington and WLC subsequently opposed a motion for summary judgment, which motion I denied, and the case proceeded to trial.
After a four-day trial, the jury found that retaliation had been a"motivating factor" in USAID's decision not to select Porter for two positions and awarded Porter compensatory damages of $15,000 on each retaliation claim. After the jury verdict, plaintiff moved for equitable relief, including promotion to a higher pay grade, a retroactive promotion, and back pay and benefits, which I denied, and an injunction against future retaliation, which I granted.
The award of attorneys' fees and litigation expenses to Porter will be for more than $200,000.
The tax problem that gives rise to this motion is a vexing one for Title VII plaintiffs. There is very little case law that deals with it, and no controlling precedent in this Circuit. The origin of the problem appears to lie in the"assignment of income doctrine," which precludes individuals from avoiding tax consequences by assigning their income to others. See Lucas v. Earl, 281 U.S. 111, 114-15 (1930) (refusing to permit taxpayer to evade taxes through"anticipatory arrangements and contracts however skillfully devised to prevent the [income]...from vesting even for a second in the [taxpayer] who earned it."). Applying this doctrine, the IRS maintains that a successful plaintiff in a civil action who has agreed to pay a portion of a damages award to her lawyer as a contingent fee may not evade the tax on the full award simply because a portion of that award has been"assigned" (via the contingency agreement) to the lawyer.*fn1
The portion of an award that goes to pay attorney's fees may be partially deductible,*fn2 but the deduction will not be available if the Alternative Minimum Tax ("AMT") is triggered.*fn3 The unhappy result is (or theoretically can be) that the tax consequences of an award of compensatory damages can seriously diminish or even exceed the award.*fn4
Civil rights plaintiffs who settle their claims but are obligated to pay their attorneys fees under contingency agreements are treated just like other civil litigants under the assignment of income doctrine, notwithstanding that such a result is in direct conflict with the underlying purpose(s) of the fee shifting provisions applicable to civil rights litigation. See e.g., Sinyard v. Comm'r, 268 F.3d 756, 759 (9th Cir 2001) (portion of settlement in ADEA action designated as attorney's fees is income to plaintiff despite that the"anomalous result [was] no doubt unintended"); Campbell v. Comm'r 274 F.3d 1312, 1314-15 (10th Cir. 2001)(contingency fee paid to lawyer in Title VII action was income;"perceived inequities of the AMT are simply not at issue here.").
No court has squarely held that a Title VII fee award (as distinct from a fee payable from a lump sum settlement) is as taxable to the successful plaintiff as the contingent fee payable from an ordinary award of damages.*fn5 Nevertheless, the possibility that an attorney's fee award could place a successful Title VII plaintiff like Porter ...