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reporting as taxable income the portion of funds awarded that was
allocable to attorney's fees. The court based its holding on a
common fund theory that would appear to be applicable only to
opt-out class actions in which, as of the time fees are awarded,
not all members of a class have become identified or
contractually obligated to compensate the attorneys who perform
legal services for the members' benefit. This may occur where
members of a class are unknown until the conclusion of the
lawsuit and in opt-out class actions.
In opt-out class actions, persons must affirmatively decline
to be a member of the class or they are automatically members of
the class. In these opt-out class actions, there may be policy
reasons to treat funds recovered and used to pay attorney's fees
as nontaxable to the class members (namely, additional members of
the class may later be identified and held responsible for a
portion of the legal fees).
On the other hand, in opt-in class actions such as the Glass
and Stephens class actions against IDS, members must
affirmatively join the class to be considered class members. The
consequence of not specifically joining opt-in class action is
that the person not joining the class is not entitled to share in
the funds recovered by settlement or judgment.
Thus, in the opt-in class action lawsuits against IDS, when
the class closed, all class plaintiffs were identified, and
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