Although the issue has been controversial since the decision in Cotnam v. Commissioner1 in 1959, the handling of settlements and court judgment recoveries has been a matter of major concern only in the last decade.2 The issue is whether legal fees paid to the taxpayer’s attorney or attorneys are excludible from the recovery or whether the entire recovery must be included in the taxpayer’s income, with the attorney’s fee treated as a miscellaneous itemized deduction subject to the two percent floor3 which often triggers alternative minimum tax.4



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