Judgment summary
The Internal Revenue Service determined a deficiency of $11,423 in the Eilers' income tax for 2019. The dispute concerned whether the portion of certain litigation settlement proceeds consisting of attorney's fees and costs was includible in the gross income of James Wendelin Eiler and Kathryn Ann Eiler.
The Eilers contended that two fee-shifting provisions of the Fair Credit Reporting Act (FCRA) applied to exclude the settlement portion at issue from their gross income. They argued in the alternative that if the attorney's fees and costs were includible, they were deductible pursuant to section 62(a)(20), on the basis that their FCRA actions involved claims of unlawful discrimination as defined in section 62(e)(18)(i).
The court agreed with the respondent. It held that the full settlement proceeds amounts were includible in the Eilers' gross income, that the FCRA fee-shifting provisions were inapplicable because the Eilers settled their actions, and that the FCRA actions did not involve claims of unlawful discrimination as defined in section 62(e)(18)(i).
Background
In November 2017 the Eilers entered into separate but substantially similar legal service agreements with Hailes & Krieger, LLC (H&K), to pursue actions under the FCRA against LexisNexis Risk Solutions, Inc., Equifax Information Services, LLC, Experian Information Solutions, Inc., Trans Union, LLC, and various other consumer reporting agencies. The Eilers believed these entities had reported inaccurate, incomplete, and/or incorrect 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 or jury and 50% of any actual and punitive damages after subtracting costs and expenses. The attorneys would receive 50% of any actual and punitive damages after subtracting costs and expenses and 100% of attorney's fees determined by court order or negotiated to be paid by the defendant through settlement. In the absence of any recovery, the Eilers would pay no legal fees, costs, or expenses.
On September 10, 2018, James Eiler filed suit against the relevant defendants and other consumer reporting agencies in the U.S. District Court for the District of Nevada. On September 20, 2018, Kathryn Eiler filed a similar suit in the same court against the same defendants plus Chase Bank USA, N.A. From November 2018 to February 2019 the Eilers filed notices of settlement and executed settlement agreements with the relevant defendants in the first half of 2019. Each settlement agreement was for a lump sum and none separated the lump sum into damages categories.
Under the settlement agreements, the relevant defendants first issued payments to the Eilers' counsel, after which the funds were allocated among the Eilers and three law firms, H&K, Kazerouni, and Hyde & Swigart, APC, for attorney's fees and costs. The relevant defendants paid out a total of $64,750, of which $4,700 was ultimately distributed to the Eilers, with the remaining $60,050 going to the three law firms. The Eilers received Forms 1099-MISC from the relevant defendants showing other income totaling $64,750, and Forms 1099-MISC from H&K showing other income totaling $4,900. They reported only the latter amount on their 2019 tax return.
On April 25, 2022, the IRS issued a Notice of Deficiency for tax year 2019, and on July 18, 2022, the Eilers timely filed their Petition. Petitioners indicated by Status Report filed September 17, 2025, that Kathryn Ann Eiler had passed away on July 16, 2025. The case was submitted fully stipulated under Rule 122.
Core dispute
The parties did not dispute the taxability of the amounts shown on Forms 1099-MISC from H&K. The only dispute was whether the remaining $59,850 shown on Forms 1099-MISC from the relevant defendants was taxable to the Eilers.
The Eilers argued that the attorney's fees and costs portion of the settlement proceeds was excludible from gross income under the FCRA's fee-shifting provisions at 15 U.S.C. sections 1681n(a)(3) and 1681o(a)(2). In the alternative, they argued those proceeds were deductible from gross income under section 62(a)(20), on the basis that their FCRA actions involved claims of unlawful discrimination as defined in section 62(e)(18)(i) and that certain FCRA provisions provide for the enforcement of civil rights. This alternative argument presented an issue of first impression for the court.
Court findings
On the burden of proof, the court found that the respondent provided copies of the Forms 1099 sent to the Eilers by the relevant defendants for tax year 2019, which the Eilers did not dispute for accuracy or authenticity. The court held the respondent met his burden of production such that the burden of proof shifted to the Eilers. The court noted that section 7491(a) did not apply to shift the burden.
The court set out that gross income includes all income from whatever source derived unless specifically excluded under I.R.C. section 61(a), and that exclusions and deductions are construed narrowly. It noted that the taxability of settlement proceeds depends upon the nature of the claim and the actual basis of recovery, and that where a settlement agreement is silent as to allocation, the entire amount is presumed not to be excludible.
On attorney's fees, the court applied the anticipatory assignment of income doctrine from Commissioner v. Banks, under which a litigant's income includes the portion of a recovery paid to the attorney as a contingent fee. The court found the Eilers' fee arrangement was an atypical contingent fee arrangement but a contingent fee arrangement nonetheless.
The court held the FCRA fee-shifting provisions inapplicable because the Eilers did not mount successful FCRA actions but settled their cases, the relevant defendants disclaimed any fault or liability, and neither the costs nor the attorney's fees were determined by the court. The court added that even if the fee-shifting statutes applied, under Ninth Circuit authority a defendant's payment of a plaintiff's attorney's fees and costs pursuant to a fee-shifting statute constitutes income to the taxpayer, and that direct payment to the attorneys would not change the result.
On the section 62(a)(20) deduction, the court examined the ordinary meaning of civil rights as defined in section 62(e)(18)(i). It found the contemporaneous dictionary definitions at the time of the American Jobs Creation Act of 2004 associated civil rights with concepts like equal protection, due process, and voting rights, not fairness and accuracy in credit reporting. The court rejected the broad definition urged by the Eilers, noting that a general counsel memorandum is not precedential and in any event addressed the broader phrase human and civil rights.
The court found the FCRA contains no provision prohibiting discrimination on protected grounds, unlike the Equal Credit Opportunity Act. It also found that a sweeping definition of civil rights would render section 62(e)(18)(ii) superfluous. On the privacy argument, the court found the Eilers' claims were based on provisions relating to fair and accurate credit reporting, specifically 15 U.S.C. sections 1681e(b), 1681g, 1681i(a), and 1681s-2(b), rather than provisions relating to consumer privacy. The court noted the Eilers had not argued that their information was highly sensitive or intimate personal information and declined to analyze that issue further.
Outcome
The court held that the FCRA's fee-shifting provisions were inapplicable and that the attorney's fees and costs were includible in the Eilers' gross income. It held that the Eilers' FCRA actions did not involve claims of unlawful discrimination as defined in section 62(e)(18)(i), because those claims did not involve provisions of federal law providing for the enforcement of civil rights.
The portion of the litigation settlement proceeds consisting of attorney's fees and costs at issue was held to be includible in gross income and not deductible under section 62(a)(20). The court stated that an appropriate order and decision would be entered.
Major issues / areas of contention
- Whether the portion of litigation settlement proceeds consisting of attorney's fees and costs is includible in the taxpayers' gross income.
- Whether the FCRA fee-shifting provisions at 15 U.S.C. sections 1681n(a)(3) and 1681o(a)(2) operate to exclude the attorney's fees and costs portion from gross income where the cases settled.
- Whether the attorney's fees and costs are deductible under I.R.C. section 62(a)(20) as fees paid in connection with an action involving a claim of unlawful discrimination.
- Whether the FCRA actions involved claims of unlawful discrimination as defined in I.R.C. section 62(e)(18)(i), including whether the FCRA provisions at issue provide for the enforcement of civil rights.
- The application of the anticipatory assignment of income doctrine to contingent fee arrangements.
- Whether the taxpayers' FCRA claims implicate a constitutional right to informational privacy so as to fall within the definition of civil rights.