ASHINGTON, Jan. 24 - The Supreme Court ruled on Monday that the full amount of a court award or legal settlement is taxable to the successful plaintiff, even if a sizable portion goes directly to a lawyer under a contingent fee agreement.

The lower federal courts have been split on the question. Acting on government appeals in two cases, the justices voted 8 to 0, with the ailing Chief Justice William H. Rehnquist not participating, to overturn decisions by the federal appeals courts in San Francisco and Cincinnati. Both courts had rejected the Internal Revenue Service's position that all economic gain is taxable to the person who has earned it, unless specifically exempted by Congress.

Shortly before the cases were argued in November, Congress changed the tax law in favor of a subcategory of lawsuit-winning taxpayers. Under that law, the American Jobs Creation Act of 2004, taxpayers can deduct lawyers' fees and court costs "in connection with any action involving a claim of unlawful discrimination." Discrimination is broadly defined to include many kinds of employment disputes.

Writing for the court on Monday, Justice Anthony M. Kennedy said the new law would probably have applied to the cases at issue, both involving employment-related lawsuits. But the law is not retroactive and does not apply to other kinds of lawsuits. Consequently, the Justice Department had urged the court not to find the cases moot.

John W. Banks II, the plaintiff in one of the cases, Commissioner of Internal Revenue v. Banks, No. 03-892, settled an employment discrimination case against the California Department of Education for $464,000, with $150,000 of that going to his lawyer under their fee agreement.

In the other case, Commissioner of Internal Revenue v. Banaitis, No. 03-907, Sigitas J. Banaitis, a former vice president of the Bank of California, won a jury award of $4.9 million in compensatory and punitive damages in an employment dispute against the bank. The defendant paid an additional $3.9 million directly to his lawyer.

Legal expenses can generally be counted as miscellaneous itemized deductions. But their awards made both men subject to the alternative minimum tax, which eliminates miscellaneous itemized deductions. Under the new legislation, the deductions may be taken even when the alternative tax applies.

In his opinion in favor of the I.R.S., Justice Kennedy cited the long-established rule that "a taxpayer cannot exclude an economic gain from gross income by assigning the gain in advance to another party," even if the assignment was a valid business arrangement that was not undertaken for the purpose of avoiding taxes.