In a case of first impression, the United States Tax Court found that, for FCRA litigation, the entire settlement amount – including attorney’s fees – is taxable in Fair Credit Reporting Act lawsuits. The tax court judge, Benjamin Guider, held that the settlement and attorney’s fees are taxable because James Eiler and his late wife, Kathryn, settled their case rather than winning it in court. This path foreclosed the plaintiffs from using the FCRA’s fee-shifting rules. The court also rejected the plaintiffs’ separate argument that the fees should be deductible as civil rights litigation costs under Internal Revenue Code § 62(a)(20) because a dispute over credit report errors doesn’t constitute a civil rights claim under federal tax law.
The decision highlights a long-standing concern that lawyers get all the money and consumers are left empty
The decision is the poster child for the need for FCRA reform. When attorney fees are supersized over the plaintiff’s actual recovery, and the plaintiff may still owe tax on the gross settlement amount, the result can be a system that benefits lawyers far more than the consumers the statute was designed to protect. In some circumstances, a plaintiff’s tax liability could even exceed the amount ultimately received.
Facts
Plaintifff/taxpayers are James Wendelin Eiler and Kathryn Ann Eiler. They sued LexisNexis Risk Solutions, Equifax, Experian, and TransUnion, alleging FCRA violations; specifically, it was alleged that the companies reported inaccurate, incomplete, and derogatory information on their consumer reports. The couple retained Hailes & Krieger, LLC, a Nevada firm, to litigate their FCRA claims in federal court in Nevada. In its agreement with the law firm, 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 Pattorney’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”.
The Eilers executed actual settlement agreements in the first half of 2019 with all of the CRAs. 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 (Hailes & Krieger, Kazerouni Law Group, and Hyde & Swigart), the Eilers received $4,700, while the remaining $60,050 went to the law firms for fees and costs.
The lawyers get how much?
Note that the plaintiffs received $4,700 and $60,050 went to the law firms.
For the 2019 tax year, the CRAs issued Forms 1099-MISC to the plaintiffs reporting the full settlement amounts of $64,750. However, the Eilers also received a Form 1099-MISC from Hailes & Krieger showing other income of $4,900 (reflecting their net distribution). On their 2019 joint federal income tax return, the Eilers reported only the $4,900 reflected on the Form 1099-MISC from Hailes & Krieger. The IRS 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.
The taxpayer/plaintiff theories
The Eilers based their deduction on several theories:
- 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. §§ 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. § 62(a)(20). They maintained that their FCRA actions involved claims of “unlawful discrimination” as defined by I.R.C. §62(e)(18)(i) because the FCRA is a statute “providing for the enforcement of civil rights“.
The court rules
The analysis of the court’s decision is lengthy, but the plaintiff lost on all their arguments. A detailed summary of the decision is online at https://www.currentfederaltaxdevelopments.com/.
Of note is the court’s spiking of the Eilers’ reliance on the FCRA’s fee-shifting provisions under 15 U.S.C. §§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 “[t]he fee-shifting statutes are simply inapplicable.” Further, even if the fee-shifting statutes had been triggered, Ninth Circuit precedent 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 taxpayer/plaintiffs also lost on their claim that an FCRA violation is also a civil rights violation, allowing for deductibility of the full settlement and fees. The court said that “[p]opular usage of the phrase ‘civil rights’ evokes concepts like equal protection, due process, and voting rights—not fairness and accuracy in credit reporting.” In contrasting the FCRA with ECOA, where the latter has an anti-discrimination provision, the former statute has no such provision.
The Eilers argued that the FCRA is a privacy statute, essentially a civil right. Yet, the court said that the FCRA protects consumer’s interest in the accuracy of their credit records. The FCRA is “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. §1681b (permissible purposes of reports) or 15 U.S.C. §1681q (obtaining information under false pretenses). Thus, even under a privacy-centric construction, the taxpayers’ specific claims did not implicate a civil right.
The case is James Wendelin Eiler and Kathryn Ann Eiler, Deceased, v. Comm. of Internal Revenue, 167 T.C. No. 3, July 14, 2026.