The High Court opinion, issued on January 24, notes that Congress broadly defined "gross income" to include all economic gains not otherwise exempted by statute. In other words, individuals cannot avoid taxation on their damage awards or settlements by assigning in advance the right to receive expected income. The court sided with the IRS, holding that a contingent fee agreement should be treated as an anticipatory assignment, despite the fact that the precise value of the future income stream is unknown when the assignment is made.

The impact of the Court's decision is somewhat muted by recent congressional enactment of the "civil rights tax relief" provision of the American Jobs Creation Act, P.L. 108-357. This 2004 tax law amends Code Section 62, allowing taxpayers to take an above-the-line deduction for any awards received after October 22, 2004 for damages related to employment or discrimination.

Ultimately, the Supreme Court chose to side with the IRS, the Tax Court, and six different Courts of Appeal, overruling "renegade" decisions from the Sixth and Ninth Circuits. Justice Kennedy wrote the opinion, which arose in the consolidated Commissioner v. Banks and Commissioner v. Banaitis cases. All the other justices participated in the decision, with the exception of Chief Justice Rehnquist, who took no part in the decision of the cases.

-- Jeffrey L. Jacobs and Michael J. Tucker of SmartPros Ltd.