No, this is not about legal ethics, law practice management or continuing legal education. This is how to draft an employment discrimination complaint so as to get the most bang for the buck, taxwise.

The lawyer who drafted the employment discrimination complaint for Abraham J. George, 2016 T. C. Memo. 156, filed 8/22/16, got it right.

AJ complained he was harassed by his fellow car salespeople on account of national origin. He got another job, claimed he had no economic injury, and so his $45K from his previous employer’s insurer must have been for physical injury. Except he never pled that with specificity. And mental suffering is a Section 104 nonstarter.

He tried arguing State law, and IRS and AJ disagree about what State law says, but Judge Lauber says “mox nix.” We all know that when it comes to tax treatment, Federal law governs. “Although State law determines what rights a person has vis-a-vis a particular item of property, the proper characterization of those rights for Federal income tax purposes is governed by the Internal Revenue Code. See United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722-723 (1985).” 2016 T. C. Memo. 156, at p. 10.

Of course the stip AJ signed when he got the payout was the usual broad-spectrum, kitchen-sink release of and for all that is, seen and unseen.

IRS hits AJ for the $45K, and Judge Lauber is down with that.

But AJ forked over $15K to his trusty attorney. IRS says ”OK, Section 212 expense for production of income, therefore Sched A, 2% AGI floor.”

Negatory, says Judge Lauber (only a lot more formally). It’s above the line, and goes to reduce AGI. Check out Section 62(a)(20).

And no, I never heard of it either, but obviously AJ’s crafty lawyer did.

“Section 62(a)(20) allows an above-the-line deduction for attorney’s fees and court costs paid by a taxpayer in connection with any action involving a claim of  unlawful discrimination.  Section 62(e) defines ‘unlawful discrimination’ to include (among other things) acts that are unlawful under ‘Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).’  These sections refer to unlawful employment discrimination on account of race, color, religion, sex, or national origin.  The amount of the deduction cannot exceed the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement resulting from such claim.  Sec. 62(a)(20) (last sentence).” 2016 T. C. Memo. 156, at pp. 10-11.

And here’s the takeaway for you tort types to plug into your checklists and adjust your forms.

“Petitioner’s complaint alleged discrimination on account of national origin and referenced the relevant provisions of the 1964 Civil Rights Act.  The settlement agreement specifically stated that it applied to claims for compensation ‘with respect to the employment relationship and termination thereof.’  We conclude that petitioner paid legal fees to secure a settlement of his claim for unlawful employment discrimination, and section 62(a)(20) thus entitles him to an above-the-line deduction of $15,000 for his legal fees.” 2016 T.C. Memo. 156, at p. 11.