Eilers v. Commissioner: Full Settlement Proceeds Includible in Gross Income Despite Fee-Shifting Arguments

The $60K Tax Bill: How a Credit Report Settlement Backfired

The Eilers’ $60,000 settlement under the Fair Credit Reporting Act (FCRA) resulted in a $11,423 federal income tax liability. The Tax Court ruled that the full settlement amount—including attorney fees paid directly to counsel—was taxable income under the anticipatory assignment of income doctrine (Banks v. Commissioner). The decision signals that FCRA plaintiffs cannot assume attorney fees are tax-free, even when recovered via fee-shifting provisions.

The Eilers' FCRA Claims and Settlement

In November 2017, the Eilers retained Hailes & Krieger, LLC (H&K) under contingency fee agreements to pursue FCRA claims against credit reporting agencies. The agreements allocated recoveries as follows: 100% of statutory damages to the Eilers, 50% of actual and punitive damages (after costs) to the Eilers, and 100% of attorney fees to H&K. The Eilers bore no upfront costs.

By September 2018, the Eilers filed FCRA lawsuits in the District of Nevada against LexisNexis Risk Solutions, Equifax, Experian, Trans Union, and Chase Bank, alleging inaccurate or derogatory credit reporting. Settlements totaling $64,750 were reached in early 2019, paid directly to H&K’s trust account or Kazerouni Law Group, APC. After deducting costs and fees, the Eilers received $4,700. The defendants issued Forms 1099-MISC reporting $64,750 in income to the Eilers, while H&K issued a separate Form 1099-MISC for $4,900. The Eilers reported only the $4,900 on their 2019 tax return, triggering an IRS dispute over the taxability of the full settlement amount.

The Tax Dispute: Inclusion of Settlement Proceeds

The Eilers argued that the $60,050 in attorney fees paid from the $64,750 settlement should be excluded from gross income under the FCRA’s fee-shifting provisions (15 U.S.C. §§ 1681n(a)(3), 1681o(a)(2)). Alternatively, they claimed the fees were deductible under § 62(a)(20) as attorney fees for "unlawful discrimination" under § 62(e)(18)(i).

The IRS countered that the full $64,750 was taxable under § 61(a). It rejected the exclusion argument, noting that fee-shifting provisions apply to court-awarded fees, not settlement allocations. The IRS also denied the deduction, arguing that FCRA claims do not qualify as "unlawful discrimination" under § 62(e)(18)(i), which is limited to anti-discrimination statutes like Title VII or the ADA. Additionally, the IRS stated the Eilers failed to meet substantiation requirements under § 62(a)(20) and § 6001, as the settlement agreements did not allocate fees as "unlawful discrimination" damages.

The Court's Ruling: Fee-Shifting Provisions Do Not Shield Tax Liability

The Tax Court rejected the Eilers’ argument that FCRA fee-shifting provisions (15 U.S.C. §§ 1681n(a)(3), 1681o(a)(2)) excluded attorney fees from gross income. The court applied the anticipatory assignment of income doctrine (Banks v. Commissioner), holding that settlement proceeds remain taxable income to the plaintiff even when paid directly to counsel. Citing Sinyard v. Commissioner, the court noted that fee-shifting arrangements do not alter the tax treatment of settlement amounts.

The court also rejected the Eilers’ claim that FCRA claims qualified as "unlawful discrimination" under § 62(e)(18)(i), limiting the statute’s scope to anti-discrimination laws like Title VII or the ADA. The ruling reinforces that fee-shifting provisions do not immunize settlement proceeds from taxation.

The Court's Interpretation: FCRA Claims Are Not Civil Rights Claims

The Tax Court rejected the Eilers’ argument that FCRA claims qualified as "civil rights" under § 62(e)(18)(i), limiting the statute to anti-discrimination laws like Title VII or the ADA. The court noted that the FCRA regulates credit reporting accuracy, not discrimination based on protected classes. Citing the American Jobs Creation Act of 2004 (AJCA) legislative history, the court emphasized that § 62(a)(20) was intended for discrimination cases, not consumer protection statutes. The ruling reaffirms the Tax Court’s authority to define statutory boundaries, preventing taxpayers from expanding § 62(a)(20) beyond its plain language.

The FCRA's Focus: Accuracy Over Privacy

The Tax Court distinguished the FCRA’s accuracy-focused provisions (e.g., § 1681e(b), § 1681g, § 1681i(a)) from its privacy-related sections (e.g., § 1681b, § 1681q). The court rejected the Eilers’ argument that their claims implicated informational privacy, noting that the FCRA’s primary purpose is ensuring accurate credit reporting, not safeguarding sensitive data. The ruling clarifies that FCRA litigation recoveries do not qualify for § 62(a)(20) deductions, as the statute’s scope is limited to discrimination claims.

Key Takeaways for Taxpayers

The Tax Court’s ruling in Eilers v. Commissioner confirms that:

1. Settlement proceeds are taxable income under the anticipatory assignment of income doctrine (Banks), even when paid directly to counsel.
2. FCRA claims do not qualify as "unlawful discrimination" under § 62(e)(18)(i), limiting the § 62(a)(20) deduction to anti-discrimination statutes like Title VII or the ADA.
3. Attorney fees recovered in FCRA litigation are taxable income, and deductions are limited to itemized miscellaneous expenses subject to the 2% AGI floor.
4. Settlement agreements must explicitly allocate damages to qualify for deductions, and taxpayers should consult tax advisors early to avoid unexpected liabilities.

The ruling reinforces the Tax Court’s authority to define statutory boundaries, leaving little room for creative tax planning in FCRA or similar cases.