James Wendelin Eiler and Kathryn Ann Eiler, Deceased v. Commissioner of Internal Revenue, 167 T.C. No. 3, July 14, 2026

For tax practitioners managing the tax consequences of litigation settlements, the characterization of attorney's fees is a critical issue that often dictates whether a client is left with a meaningful recovery or an unexpected tax liability. In Eiler v. Commissioner, the United States Tax Court addressed a significant issue of first impression: whether litigation settlement proceeds under the Fair Credit Reporting Act (FCRA) involving credit reporting inaccuracies constitute claims of “unlawful discrimination” under Internal Revenue Code (I.R.C.) Section 62(a)(20).

Historically, the Supreme Court’s landmark ruling in Commissioner v. Banks, 543 U.S. 426 (2005), established that a taxpayer’s gross income includes the portion of a litigation recovery paid to an attorney under a contingent fee arrangement. While Congress created an above-the-line deduction in I.R.C. Section 62(a)(20) to mitigate this harsh result for cases involving “unlawful discrimination” or civil rights enforcement, the Tax Court in Eiler strictly limited this exception. The court held that the taxpayers’ claims under the FCRA did not involve the enforcement of "civil rights" as contemplated by I.R.C. Section 62(e)(18)(i), rendering the attorney's fees fully taxable and nondeductible above-the-line.

Factual Background of the Dispute

The taxpayers, James Wendelin Eiler and Kathryn Ann Eiler, resided in Nevada during the relevant tax year. In November 2017, the Eilers entered into legal service agreements with Hailes & Krieger, LLC (H&K) to pursue FCRA claims against LexisNexis Risk Solutions, Inc., Equifax Information Services, LLC, Experian Information Solutions, Inc., and Trans Union, LLC. The Eilers believed these consumer reporting agencies had reported inaccurate, incomplete, and derogatory information on their credit reports.

The service agreements provided that the Eilers would receive 100% of any statutory damages "as awarded by Court/jury" and 50% of any actual and punitive damages after subtracting costs and expenses. The law firms were entitled to receive the remaining 50% of actual and punitive damages, along with 100% of attorney’s fees "determined by Court Order or negotiated to be paid by the Defendant through settlement of the Matter". The agreement specifically warned the Eilers that their attorneys "might recover tens of thousands of dollars, if not more, in fees and costs even if the Eilers did not obtain any financial recovery, and that even in that situation the Eilers might face increased tax liability".

In September 2018, the Eilers filed separate suits under the FCRA in the U.S. District Court for the District of Nevada. Between November 2018 and February 2019, the parties reached settlements, and the Eilers executed actual settlement agreements in the first half of 2019. Each settlement was for a lump sum and did not allocate the payments among statutory, actual, or punitive damages, or attorney’s fees.

The defendants paid a total of $64,750 directly to the Eilers' counsel. Following the allocation of these funds among the Eilers and three representing law firms (H&K, Kazerouni Law Group, APC, and Hyde & Swigart, APC), the Eilers received $4,700, while the remaining $60,050 went to the law firms for fees and costs.

The credit reporting agencies issued Forms 1099-MISC to the Eilers reporting the full settlement amounts of $64,750. However, the Eilers also received a Form 1099-MISC from H&K showing other income of $4,900 (reflecting their net distribution). On their timely filed 2019 joint federal income tax return, the Eilers reported only the $4,900 reflected on the Form 1099-MISC from H&K. The Internal Revenue Service (IRS) subsequently issued a Notice of Deficiency determining a tax deficiency of $11,423 based on the failure to include the full $64,750 settlement amount in gross income.

Taxpayers’ Request for Relief

Before the Tax Court, the taxpayers advanced two primary positions for relief:

Exclusion from Gross Income: The Eilers argued that the portion of the settlement proceeds representing attorney’s fees and costs should be entirely excluded from their gross income under the FCRA’s statutory fee-shifting provisions, specifically 15 U.S.C. Sections 1681n(a)(3) and 1681o(a)(2). They asserted that because the fees were negotiated under these provisions and did not follow a typical contingency percentage, they did not trigger assignment-of-income treatment.
Above-the-Line Deduction: In the alternative, the Eilers argued that if the fees were includible in gross income, they were entitled to an above-the-line deduction under I.R.C. Section 62(a)(20). They maintained that their FCRA actions involved claims of “unlawful discrimination” as defined by I.R.C. Section 62(e)(18)(i) because the FCRA is a statute "providing for the enforcement of civil rights".

The Court’s Analysis of Gross Income and Contingent Fees

Judge Guider began the analysis by reiterating the broad sweep of I.R.C. Section 61(a), which includes all income from whatever source derived, and noted that "exclusions from income must be narrowly construed". The burden of proof shifted to the taxpayers because the IRS established a proper foundation using the Forms 1099-MISC.

Addressing the inclusion of the settlement proceeds, the court observed that the settlement agreements were entirely silent regarding any allocation to types of damages. Citing Holliday v. Commissioner, T.C. Memo. 2021-69, the court noted that "Where the agreement is silent as to the basis of the settlement or where the agreement does not specify that the payment was for a reason that a court finds to be nontaxable, this Court has held the settlement payment to be taxable". Because the Eilers failed to prove any specific allocation to excludible categories, the entire settlement was presumed taxable.

The court then addressed the Eilers' claim that their atypical fee arrangement escaped the holding of Commissioner v. Banks, 543 U.S. 426 (2005). Under Banks, "[A]s a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee". The Supreme Court justified this via the anticipatory assignment of income doctrine, ruling that a taxpayer "cannot exclude an economic gain from gross income by assigning the gain in advance to another party".

Judge Guider rejected the taxpayers' attempts to distinguish their legal service agreements from standard contingency fees, noting that a contingent fee is simply a "fee charged for a lawyer’s services only if the lawsuit is successful or is favorably settled out of court". Although atypical, the Eilers' fee structure was contingent upon recovery, thus fitting the definition.

Furthermore, the court dismissed the Eilers' reliance on the FCRA's fee-shifting provisions under 15 U.S.C. Sections 1681n(a) and 1681o(a). Fee-shifting under these sections requires a “successful action to enforce any liability under this section,” where costs and reasonable fees are “determined by the court”. Because the Eilers settled their cases out of court and the defendants disclaimed all liability, the court found that "The fee-shifting statutes are simply inapplicable".

Even if the fee-shifting statutes had been triggered, Ninth Circuit precedent (to which the case was appealable) firmly establishes that fee-shifting awards represent gross income to the taxpayer. Under Sinyard v. Commissioner, 268 F.3d 756, 759–60 (9th Cir. 2001), “a defendant’s payment of a plaintiff’s attorney’s fees and costs pursuant to a fee-shifting statute constitutes income to the taxpayer”. The tax court concluded that "A third party’s discharge of a taxpayer’s obligation is income to the taxpayer," regardless of whether the funds are paid to the attorneys directly. While the taxpayers complained of a "perverse result" where the tax on the legal fees swallowed their recovery, the court stated, quoting Sinyard, that it "do(es) not think we can change the basic rules of income tax in order to correct this result".

The Statutory Construction of I.R.C. Section 62 and "Civil Rights"

Having determined that the full settlement amount was includible in gross income, the Tax Court turned to the alternative argument under I.R.C. Section 62(a)(20). This section allows an above-the-line deduction for attorney's fees paid in connection with an action involving a claim of "unlawful discrimination". Under I.R.C. Section 62(e)(18)(i), "unlawful discrimination" includes acts prohibited under any provision of federal, state, or local law "providing for the enforcement of civil rights".

Because "civil rights" is not defined in I.R.C. Section 62, the court applied standard principles of statutory construction. Quoting Food Marketing Institute v. Argus Leader Media, 588 U.S. 427, 433–34 (2019), Judge Guider noted that when a term is undefined, "we ask what that term’s ‘ordinary, contemporary, common meaning’ was when Congress enacted [the provision]" (referencing the American Jobs Creation Act of 2004).

Contemporaneous dictionaries, such as the eighth edition of Black's Law Dictionary (published in 2004), defined "civil right" as the “individual rights of personal liberty guaranteed by the Bill of Rights and by the 13th, 14th, 15th, and 19th Amendments, as well as by legislation such as the Voting Rights Act”. The court observed:

"Popular usage of the phrase ‘civil rights’ evokes concepts like equal protection, due process, and voting rights—not fairness and accuracy in credit reporting."

The court contrasted the FCRA with the Equal Credit Opportunity Act (ECOA), enacted by Congress in 1974. The ECOA explicitly makes it unlawful for a creditor to discriminate against an applicant on the basis of race, color, religion, national origin, sex, marital status, or age. The court pointed out that the FCRA contains no such general anti-discrimination provisions, which "one would expect if Congress had intended the FCRA to protect civil rights".

Moreover, the court applied the canon against statutory surplusage, noting that under Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929, 1939 (2022), statutes must be construed "so that effect is given to all provisions, so that no part will be inoperative or superfluous, void or insignificant". If "civil rights" under Section 62(e)(18)(i) were interpreted as broadly as the Eilers argued (to encompass any legally enforceable claim), it would render I.R.C. Section 62(e)(18)(ii)—which covers laws regulating employment relationships, wages, and retaliation—completely superfluous. Consequently, the context demanded a narrower, more traditional reading of "civil rights".

Specific Pleadings and Informational Privacy Arguments

The Eilers also attempted to anchor their FCRA claims in a narrow constitutional definition of civil rights by arguing that violations of credit privacy implicate a constitutional right to informational privacy under the Fourteenth Amendment.

The Tax Court rejected this creative argument by focusing on the precise statutory language of I.R.C. Section 62(e)(18), which references "[a]ny provision of Federal... law" rather than the statute as a whole. Pointing to the definition of a "provision" as a "particular requirement in a law, rule, agreement, or document," the court emphasized that it must evaluate the specific provisions under which the Eilers actually brought their claims.

The Eilers' district court complaints alleged violations of the following specific provisions:

15 U.S.C. § 1681e(b) (requiring reasonable procedures to assure maximum possible accuracy)
15 U.S.C. § 1681g (disclosures to consumers)
15 U.S.C. § 1681i(a) (procedure in case of disputed accuracy and reinvestigations)
15 U.S.C. § 1681s-2(b) (duties of furnishers of information upon notice of dispute)

Reviewing these specific sections, the court concluded that they are designed to protect a consumer’s interest in the accuracy of their credit records and "were based on provisions related to ‘fair and accurate credit reporting,’ not ‘consumer privacy’". The Eilers had not pleaded violations of the actual privacy-related provisions of the FCRA, such as 15 U.S.C. Section 1681b (permissible purposes of reports) or 15 U.S.C. Section 1681q (obtaining information under false pretenses). Thus, even under a privacy-centric construction, the taxpayers' specific claims did not implicate a civil right.

Technical Conclusions and Practice Implications

The Tax Court concluded its opinion by holding that:

The statutory fee-shifting provisions of the FCRA are inapplicable to settled cases where liability is disclaimed.
Attorney's fees and costs incurred in a settled litigation are fully includible in the taxpayers' gross income under the anticipatory assignment of income doctrine.
Deductions are a matter of legislative grace and must be narrowly construed. The court declined to extend the term "civil rights" in I.R.C. Section 62(e)(18)(i) to cover statutory consumer protection claims under the FCRA.
Therefore, the attorney's fees and costs are not deductible above-the-line under I.R.C. Section 62(a)(20).

For tax and legal professionals, this case carries significant strategic implications:

Pleading-Specific Tax Outcomes: Because the Tax Court evaluates the tax character of legal fees based on the specific "provisions" of law pleaded in the underlying action, litigators must carefully draft complaints. If a consumer protection statute contains both technical/accuracy provisions and distinct privacy/confidentiality provisions, pleading the latter may preserve a colorable argument for above-the-line deduction under a "civil rights" or "right to privacy" theory, whereas pleading only accuracy provisions will not.
Below-the-Line Deduction Limitations: Although the IRS conceded that the Eilers' fees were deductible under I.R.C. Section 212 (for the production of income), this concession is of little comfort. Following the Tax Cuts and Jobs Act of 2017, miscellaneous itemized deductions subject to the 2% adjusted gross income floor—including I.R.C. Section 212 legal expenses—are completely suspended for tax years 2018 through 2025. Consequently, failing to qualify under I.R.C. Section 62(a)(20) results in a complete loss of the tax deduction for the legal fees, forcing the client to pay income tax on funds that were paid directly to their attorneys.
Settlement Allocation Clauses: While a unilateral allocation in a settlement agreement does not bind the IRS, practitioners should attempt to include precise allocations in settlement documents where a portion of the payment is negotiated explicitly under fee-shifting or excludible physical-injury provisions, as silent settlement agreements are presumed fully taxable to the plaintiff.

Prepared with assistance from NotebookLM.