No deduction for attorneys’ fees from Fair Credit Reporting Act suit

The Tax Court held that a married couple who settled two lawsuits claiming that consumer credit reporting agencies violated the Fair Credit Reporting Act (FCRA) were required to include the full amount of the settlement payments they received in gross income. The court also held they could not take a deduction from gross income under Sec. 62(a)(20) for the attorneys’ fees paid from the settlement payments because their FCRA actions did not involve claims of “unlawful discrimination” as defined in Sec. 62(e)(18)(i).

Background

James and Kathryn Eiler sued multiple consumer credit reporting agencies under provisions of the FCRA, claiming that the companies had reported inaccurate, incomplete, and/or incorrect and derogatory information on their credit reports. The Eilers entered into legal services agreements with the law firm Hailes & Krieger (H&K) to represent them in their suits against the agencies.

Under the agreements, H&K would receive a portion of the damages awarded through trial or settlement, as well as costs and expenses (which would be subtracted from any gross recovery) and any attorneys’ fees awarded by the court or negotiated with the defendants through settlement. However, the agreements also stipulated that in the absence of recovery, the Eilers would pay no legal fees, costs, or expenses. The Eilers further acknowledged in the agreements that “other fee arrangements are available (i.e., hourly and flat fee arrangements), but that the parties determined that a contingency fee on the terms described herein is appropriate.”

The Eilers settled with each credit reporting agency in 2018 and 2019 and executed settlement agreements with them in the first half of 2019. Each of the settlement agreements was for a lump sum; none of them separated the lump sum into the categories included in the service agreements.

The credit reporting agencies agreed to pay the Eilers a total of $64,750. Under the agreements the Eilers made with H&K, the Eilers were paid $4,700, and the remaining $60,050 was paid to H&K and two other law firms. The Eilers received Forms 1099–MISC, Miscellaneous Information, from the credit reporting agencies showing other income of $64,750. They also received Forms 1099–MISC from H&K showing other income totaling $4,900.The Eilers included only the $4,900 reported to them by H&K in income on their 2019 tax return.

The IRS issued a notice of deficiency to the Eilers for tax year 2019, determining an income tax deficiency of $11,423 because the couple had not included the full amount of the settlement payments in income. In response, the Eilers filed a timely petition in Tax Court challenging the IRS’s determination. In Tax Court, the Eilers argued that the portion of the settlement payments consisting of attorneys’ fees and costs was excludable from their gross income under two fee–shifting provisions of the FCRA. In the alternative, they argued that if the attorneys’ fees and costs were includable in their gross income, they were deductible pursuant to Sec. 62(a)(20) because their suits under the FCRA involved claims of “unlawful discrimination” as defined in Sec. 62(e)(18)(i), and certain provisions of the FCRA provide for the enforcement of civil rights.

The Tax Court’s decision

The Tax Court held that the full amount of the settlement payments was includable in the Eilers’ gross income and that because the couple settled their FCRA actions, the FCRA fee–shifting provisions did not apply. The court further held that the FCRA actions did not involve claims of unlawful discrimination under Sec. 62(e)(18)(i), so the Eilers could not deduct the attorneys’ fees paid out of the settlement payments.

Gross income

Under Sec. 61(a), gross income includes all income from whatever source derived, unless otherwise specifically excluded. Whether the proceeds from a lawsuit or a settlement are taxable depends upon the nature of the claim and the actual basis of recovery. Where the agreement is silent as to the basis of the settlement or does not specify that the payment was for a reason that a court finds to be nontaxable, the Tax Court has held that the settlement payment is taxable. Because the Eilers’ settlement agreements were silent as to the allocation of settlement payments to any type of damages, the Tax Court held that the settlement payments were taxable.

As the Supreme Court held in Banks, 543 U.S. 426 (2005), under the anticipatory– assignment–of–income doctrine, if a settlement payment is income to its recipient, the recipient’s income includes any portion of the settlement payment paid as a contingent fee to an attorney. The Eilers contended that the fees they paid to H&K were contingent only in the limited sense that the attorneys would receive nothing if the Eilers recovered nothing, not in the sense that the attorneys would receive a fixed percentage of the total recovery. The Tax Court agreed that the Eilers’ arrangement with H&K was atypical in that respect. However, because the fees were contingent upon recovery by the Eilers, the court found it was a contingent fee arrangement nonetheless. Accordingly, the attorneys’ fees they paid to H&K were includable in their income.

The Eilers argued that instead of being paid to the attorneys under a contingent fee arrangement, the fees in their case were negotiated pursuant to the fee–shifting provisions of the FCRA (15 U.S.C. §§1681n(a) and 1681o(a)). The fee–shifting provisions, however, specify that they apply only in the case of a successful FCRA action where the attorneys’ fees are determined by the court. As the Tax Court pointed out, the Eilers did not mount successful FCRA actions because they settled their cases and the attorneys’ fees were not determined by a court. Therefore, the court found that the fee–shifting provisions did not apply. Even if they did apply, the Tax Court noted that under precedent of the Ninth Circuit (to which an appeal of the Eilers’ case would lie), fees and costs a defendant pays to an attorney on behalf of a plaintiff under a fee–shifting statute are income to the taxpayer (Sinyard, 268 F.3d 756, 759—60 (9th Cir. 2001), aff’g T.C. Memo. 1998–364).

Deduction of attorneys’ fees under Sec. 62(a)(20)

The Tax Court then addressed the Eilers’ alternative claim that they were entitled to a deduction from gross income for the attorneys’ fees under Sec. 62(a)(20). That subsection allows a deduction for attorneys’ fees and court costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim of unlawful discrimination. Under Sec. 62(e)(18)(i), for purposes of Sec. 62(a)(20), “unlawful discrimination” includes an act that is unlawful under any provision of federal, state, or local law (or common–law claims permitted under those laws), providing for the enforcement of civil rights. According to the Eilers, the attorneys’ fees and costs were deductible under Sec. 62(a)(20) because their actions under the FCRA involved claims of “unlawful discrimination” as defined in Sec. 62(e)(18)(i), and certain provisions of the FCRA provide for the enforcement of civil rights. This was an issue of first impression for the Tax Court.

The term “civil rights” is not defined in Sec. 62. Because it is not, the Tax Court found, citing Food Marketing Institute v. Argus Leader Media, 588 U.S. 427, 433—34 (2019), that it was required to determine what the term’s ordinary, contemporary, and common meaning was when Congress enacted the relevant provision. The court found that “civil rights” was generally defined by contemporaneous dictionaries 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” (quoting Civil Right, Black’s Law Dictionary (8th ed. 2004)). “Civil rights include esp[ecially] the right to vote, the right of due process, and the right of equal protection under the law” (id).

The Eilers urged the court to embrace a wider scope for the term “civil rights.” They pointed to a definition from the legal encyclopedia American Jurisprudence 2d, in which the term was defined as “a privilege accorded to an individual, as well as a right due from one individual to another, the violation of which is a civil injury for which redress may be sought in a civil action” (15 Am. Jur. 2d, Civil Rights §1 (2025)). “Thus, a civil right is a legally enforceable claim of one person against another. ‘Civil rights’ have also been defined simply as such rights as the law will enforce, or as all those rights which the law gives a person” (id. (footnote omitted)).

The Eilers further argued that a broad definition of “civil rights” was supported by an IRS general counsel memorandum, GCM 38468, which applied a broad scope to the phrase “human and civil rights” in the context of Sec. 501(c)(3) charitable organizations. However, the Tax Court was not persuaded by this claim. It noted that a general counsel memorandum is merely a legal opinion and is not precedential. Moreover, GCM 38468 applied a broad scope to the term “human and civil rights.” The court found that, logically, the scope of “human and civil rights” would be broader than the scope of “civil rights” alone.

The Tax Court also observed that “[t]he ordinary meaning of a word is not ‘the broadest possible meaning that the definition of the word can bear’; it is how the word is ‘normally’ and most ‘natural[ly]’ understood” (citing Taniguchi v. Kan Pacific Saipan, Ltd., 566 U.S. 560, 569 (2012)). According to the court, “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 Tax Court found that these rights included within the meaning of “civil rights” were similar to rights that Congress sought to protect in 1974 in the Equal Credit Opportunity Act, P.L. 93–495. That act included a provision that makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction … on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract).” The court noted that “[t]he FCRA contains no such provision, wording Congress easily could have included and which one would expect if Congress had intended the FCRA to protect civil rights.”

The Supreme Court has held that statutes should be interpreted “so that effect is given to all provisions, so that no part will be inoperative or superfluous, void or insignificant” (Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929, 1939 (2022)). The Tax Court found that if the term “civil rights” in Sec. 62(e)(18)(i) was given a sweeping meaning, Sec. 62(e)(18)(ii), dealing with “the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law” would be subsumed by Sec. 62(e)(18)(i) and rendered superfluous. Thus, the court determined that the context of the statute supported giving “civil rights” a narrower meaning than that suggested by the Eilers.

The Eilers also argued that the FCRA’s protection of consumer privacy implicates a constitutional right to informational privacy. The Ninth Circuit has recognized that a right to informational privacy exists under the Fourteenth Amendment (Doe v. Bonta, 101 F.4th 633, 637 (9th Cir. 2024)). The Eilers claimed that the FCRA’s consumer privacy protections fall under that right to informational privacy and that therefore their actions were claims of unlawful discrimination of the kind contemplated by Sec. 62(e)(18)(i). The Tax Court found that while the FCRA had provisions that related to privacy, it had other provisions that did not. Based on the text of Sec. 62(e)(18)(i), the court determined that for the Eilers’ claims in their FCRA action to be claims of unlawful discrimination of the kind contemplated by Sec. 62(e)(18)(i), the claims must be based on provisions of the FCRA that are related to privacy.

After reviewing the Eilers’ claims from their FCRA action against the credit reporting agencies, the Tax Court found that all the claims were based on provisions of the FCRA related to fair and accurate credit reporting, not on provisions of the act related to privacy. Therefore, the court held that even using a “civil rights” definition that included a right of informational privacy, the Eilers’ claims were not of unlawful discrimination under Sec. 62(e)(18)(i).

Reflections

In a footnote, the Tax Court noted that the IRS had conceded that the attorneys’ fees in question were deductible as miscellaneous itemized deductions under Sec. 212, and that, while not necessarily agreeing with the IRS’s concession, it would not explore the issue further because of that concession. However, as a result of the Tax Cuts and Jobs Act, P.L. 115–97, all miscellaneous itemized deductions were suspended beginning in 2018. While the Eilers may have hoped for a windfall from their suits against the various credit reporting agencies, they ended up with a tax bill greater than the total portion of the settlement payments they received.

Eiler, 167 T.C. No. 3 (2026)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.