IRS Turns Victory To Defeat

Cindy Spina should be one of the happiest people around.

She finally won a sexual harassment lawsuit against her employer. It took six long years.

"I was elated," says Spina. "I can't even describe how I felt - I felt so good."

She was awarded $1.5 million, including fees for her attorney.

But then, as CBS News Correspondent Lee Cowan reports, the IRS got involved.

"This is where it gets to be Alice in Wonderland time," says attorney Monica McFadden.

After legal expenses, Spina was left with $375,000.

But the IRS wanted $475,000 in taxes. So not only did she have to give up her entire award, but she owed the $100,000 tax bill.

"It felt like my victory was taken from me," says Spina.

And she is not alone.

"It's happening to every civil rights plaintiff that wins a lawsuit," says McFadden.

They are victims of a little known portion of the U.S. tax code called the Alternative Minimum Tax, or AMT.

It's no mistake, says David Cay Johnston, author of "Perfectly Legal."

"The Alternative Minimum Tax is like a parallel universe," says Johnston. "Think about a "Star Trek" episode - there's the world here, and then there's this parallel evil world over here."

Cindy was beamed into that world when, like any taxpayer, she thought she could write off the cost of her attorney. Under the AMT, though, everything that went to her attorney was counted as income.

"Everyone knows she doesn't get this income," says McFadden. "Congress knows, the courts know, I know, the defendants know, the world knows, but according to the IRS, it's her money."

The U.S. District Court in Chicago was sympathetic. The judge knew an award that size would automatically trigger the AMT, and in the end, would produce what even he called an "unjust result." But his hands were tied. If there were shortcomings in the law, he said, it was up to Congress to fix, not the courts.

That's the same argument even the IRS makes.

In fact, the IRS is expected to warn Congress this week that the AMT is the biggest problem facing American taxpayers.

"All along the system is an acknowledgement that this is broken, but we're not fixing it - we don't have the will yet to fix it, and it is in Congress' hands," says Nina Olsen, of the IRS.

And unless something changes, attorneys fear perfectly legitimate civil rights cases may never be brought because winning may leave clients worse off than losing.

"To have to say to this person, 'Guess what, you're going to get screwed, and I can't do a damn thing about it,' you feel powerless," says McFadden.

"It doesn't seem right, and it doesn't seem fair that you can win a victory and have to pay out of pocket," says Spina. "It doesn't seem like the American way."

It all leaves Spina wondering whether it would have been better to suffer her harassment in silence than to have gone to court and be stuck with a tax bill more than twice her income.