Banks v. CIR

• Court: Court of Appeals for the Sixth Circuit
• Decided: September 30, 2003
• Docket: 01-2177
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Banks v. Comm’r Nos. 01-2171/2177 ELECTRONIC CITATION: 2003 FED App. 0347P (6th Cir.) File Name: 03a0347p.06 _________________ COUNSEL UNITED STATES COURT OF APPEALS ARGUED: James R. Carty, MECKLER, BULGER & FOR THE SIXTH CIRCUIT TILSON, Chicago, Illinois, for Appellant. Kenneth W. _________________ Rosenberg, UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION, TAX DIVISION, JOHN W. BANKS , II, X Washington, D.C., for Appellee. ON BRIEF: James R. Petitioner-Appellant, - Carty, MECKLER, BULGER & TILSON, Chicago, Illinois, - Roger J. Jones, Russell R. Young, MAYER, BROWN, - Nos. 01-2171/2177 ROWE & MAW, Chicago, Illinois, for Appellant. Richard v. - Farber, John A. Nolet, UNITED STATES DEPARTMENT > OF JUSTICE, APPELLATE SECTION, TAX DIVISION, , Washington, D.C., for Appellee. COMMISSIONER OF INTERNAL - REVENUE, - CLAY, J., delivered the opinion of the court, in which Respondent-Appellee. - LAWSON, D. J., joined. MOORE, J. (pp. 29-30), delivered - a separate opinion concurring in part and dissenting in part. N On Appeal from the United States Tax Court. _________________ No. 18097-97—David Laro, Tax Court Judge. OPINION Argued: March 12, 2003 _________________

Decided and Filed: September 30, 2003 CLAY, Circuit Judge. This is a consolidated appeal from a decision of the United States Tax Court. In Case Nos. 01- Before: MOORE and CLAY, Circuit Judges; LAWSON, 2171 and 01-2177, Petitioner John W. Banks, II appeals from District Judge.* the tax court’s decision in favor of the Commissioner of Internal Revenue finding, inter alia, deficiencies in Petitioner’s income tax due for the taxable year 1990 in the amount of $99,068.00. In an accompanying memorandum opinion, the tax court ruled, inter alia, that (1) Petitioner could not exclude from gross income money he received pursuant to an out-of-court settlement, including the portion thereof his attorney had received as a contingency fee; and (2) Petitioner was not entitled to an income tax deduction in the taxable year 1990 for payments made to his former spouse * The Honorable David M. Lawson, United States District Judge for as part of their divorce settlement. See Banks v. Comm’r, 81 the Eastern D istrict of M ichigan, sitting by de signation.

1 Nos. 01-2171/2177 Banks v. Comm’r 3 4 Banks v. Comm’r Nos. 01-2171/2177

T.C.M. (CCH) 1219, 2001 WL 196751, 2001 Tax Ct. Memo abandoned Counts 4, 5, and 6 of the second amended LEXIS 68 (Feb. 28, 2001). We AFFIRM in part and complaint, leaving the remaining claims (by process of REVERSE in part the tax court’s decision. elimination) as Counts 1, 2, and 3, i.e., the violations of Title VII, 42 U.S.C. § 1981, and 42 U.S.C. § 1983. The fact that I. FACTUAL BACKGROUND the §§ 1981 and 1983 claims were still being litigated was evidenced elsewhere in the order, both in the “Points of Law” A. Petitioner’s California Federal Court Lawsuit and section (where the district court directed the parties to brief Settlement “[t]he elements, standards and burdens of proof relative to” §§ 1981 and 1983 claims) (J.A. at 147-48), and in the Petitioner worked as an educational consultant with the “Disputed Factual Issues” section (which includes the issue California Department of Education (“CDOE”) from 1972 to of “[w]hether the defendants acted under color of state law to 1986, when he was terminated. In response to his deprive [Petitioner] of his rights, privileges and immunities termination, Petitioner filed a civil action against the CDOE secured by the Constitution by engaging in discriminatory (and various past and present employees therein) in the practices”).1 (J.A. at 141-42.) Abandoning counts 4, 5, and federal district court for the Eastern District of California. 6, in itself, did not eliminate any of the forms of relief Petitioner’s second amended complaint alleged six counts. Petitioner originally had requested in his second amended Counts 1, 2, and 3 alleged employment discrimination in complaint. However, the “Relief Sought” section of the violation of 42 U.S.C. §§ 1981 and 1983; Title VII of the pretrial order indicated the following: “[Petitioner] seeks Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e to only reinstatement, back pay, and attorneys’ fees.” (J.A. at 2000e-17 (2000); and California Government Code § 12965, 147.) The limitation on relief sought was also confirmed in respectively. Counts 4, 5, and 6 asserted state law tort claims; the part of the pretrial order calling for a non-jury trial: specifically, Count 4 alleged intentional infliction of “Although plaintiff had heretofore demanded a jury trial, he emotional distress, and Counts 5 and 6 alleged slander. concedes that since he now seeks only back pay and equitable Petitioner’s lawsuit sought general damages, future medical relief, a jury trial is not appropriate.” (J.A. at 132) (emphasis and hospital expenses, punitive and exemplary damages, back added). pay and related employee benefits, various injunctions, and attorney’s fees. In bringing the lawsuit Petitioner retained an Petitioner’s trial commenced, and nine days into the trial, attorney who agreed to represent Petitioner pursuant to a at the court’s urging, the parties held a settlement conference. contingency fee agreement. Testimony at the tax court trial from Petitioner’s attorney in Settlement attempts failed, and Petitioner’s case proceeded toward trial. The district court entered a final pretrial 1 conference order on September 22, 1989. Under the The phrasing of this issue fairly represents the language of § 1983, “Abandoned Issues” section, the pretrial order stated, which provides that “[e]very person who , under color of any statute, “[Petitioner] has abandoned all claims for damages relative to ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the state tort claims, including a claim for intentional and United States or other person within the jurisdiction thereof to the negligent imposition of emotional distress, tortious deprivation of any rights, privileges, or immunities secured by the interference with business relations, and defamation.” (J.A. Constitution and laws, shall be liable to the party injured in an action at at 148.) Thus, according to the pretrial order, Petitioner law, suit in equity, or other proper proceeding for redress.” 42 U.S.C. § 1983. Nos. 01-2171/2177 Banks v. Comm’r 5 6 Banks v. Comm’r Nos. 01-2171/2177

the California federal court action, as well as a letter from B. Petitioner’s Alimony Payment to His Former Spouse Petitioner to an Internal Revenue Service (“IRS”) agent, and Deduction indicated that Petitioner had initially requested $850,000 during settlement discussions, and that he and his attorney On November 1, 1984, the marriage of Petitioner and his had arrived at that proposed settlement figure based on first wife, Verna Banks, was dissolved. In adjudicating the Petitioner’s salary. The defendants countered with an offer of impending dissolution, the California Superior Court issued $464,000, apparently arguing that Petitioner should take less an order, dated January 2, 1984, declaring that Verna Banks money because he could designate the amount as personal was entitled to 43.95% of Petitioner’s gross monthly military injury damages and render it non-taxable. Petitioner and his retirement payments. Pursuant to this order, Petitioner began attorney agreed to the $464,000 settlement amount, so long as making payments to Verna Banks, but the payments did not it could be characterized in the settlement agreement as start until 1987 and only constituted 43.95% of Petitioner’s compensation for personal injury damages. However, net, rather than gross, retirement payments. Consequently, Petitioner’s attorney testified at the tax court trial that he arrears immediately began to accrue to Verna Banks. On warned Petitioner that although the settlement agreement April 6, 1988 and December 4, 1989, Verna Banks obtained could characterize the $464,000 proceeds as personal injury orders for the arrearage, plus attorney’s fees, and she later damages, there was no guarantee that the IRS would returned to court to enforce the orders in 1990. On October subsequently agree to this characterization. 30, 1990, the California Superior Court, taking note of Petitioner’s recent out-of-court settlement with the CDOE, On May 30, 1990, Petitioner and the CDOE entered into an ordered Petitioner to pay Verna Banks $12,156.81 out of the agreement that settled all of Petitioner’s outstanding claims $464,000 settlement proceeds from the civil lawsuit Petitioner for $464,000. The agreement provided, in part, as follows: had filed in federal district court in California. The court further ordered Petitioner to place an additional $20,000, plus 1. The [CDOE] agrees object [sic] to pay to $3,850 in attorney’s fees, in an interest-bearing account until [Petitioner] of the sum of $464,000.00 in full and Petitioner began to make timely payments to Verna. The complete satisfaction of his claims. [Petitioner] amounts the court ordered Petitioner to pay totaled characterizes this payment of $464,000.00 as $36,006.81. payment for personal injury damages suffered after [Petitioner’s] discharge on July 14, 1986. In 1990, Petitioner paid $72,013.62 (double the $36,006.81 of the court’s order in lieu of posting an appellate bond) into (J.A. at 159.) Of this $464,000, Petitioner paid $150,000 to California Superior Court and filed several appeals, all of his attorney in fees, pursuant to the contingency fee which ultimately proved unsuccessful. Eventually, Verna arrangement between them. Petitioner did not include any of Banks agreed to receive Petitioner’s $72,013 deposit in the $464,000 settlement proceeds as gross income on his 1990 satisfaction of all arrears (except for $45,987 in arrears federal income tax return. Petitioner owed Verna from 1979 to 1986). The court transferred the $72,013.62 to Verna in 1993, and Petitioner deducted the $72,013.62 in the 1993 tax year as an alimony payment deduction. However, at the tax court trial Petitioner argued that he was entitled to claim that deduction for the 1990 tax year. Nos. 01-2171/2177 Banks v. Comm’r 7 8 Banks v. Comm’r Nos. 01-2171/2177

C. The Commissioner’s Notices of Deficiency and the three rulings was entered on May 21, 2001.3 Petitioner’s Tax Court’s Decision timely appeal followed. On May 30, 1997, the Commissioner issued a Notice of II. STANDARD OF REVIEW Deficiency to Petitioner for the tax year ending December 31, 1990,2 in the amount of $101,168.00. Petitioner filed a We review the tax court’s legal conclusions de novo and its petition in the tax court, requesting a redetermination of the factual findings for clear error. Zack v. Comm’r, 291 F.3d deficiencies. The cases were consolidated, and the matter 407, 412 (6th Cir. 2002) (citing MTS Int’l, Inc. v. Comm’r, proceeded to trial. 169 F.3d 1018, 1021 (6th Cir. 1999)). We will conclude that a factual finding is clearly erroneous only if, upon our review On February 28, 2001, the tax court filed a Memorandum of the entire record, we are “left with the definite and firm Findings of Fact and Opinion (“tax court opinion” or conviction that a mistake has been committed.” Id. (quoting “opinion”). For purposes of this appeal, the tax court opinion Sanford v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir. made three relevant rulings. First, it determined that the 2001)) (internal quotation marks omitted). entire $464,000 amount Petitioner received in settlement of his California federal court lawsuit constituted taxable income III. ANALYSIS because, contrary to Petitioner’s arguments, none of the settlement amount was attributable to a claim of personal A. Whether the Amount Paid in Settlement of injury. Second, the tax court determined that the $150,000 Petitioner’s Lawsuit was Attributable to a Claim of Petitioner had paid out of the $464,000 settlement amount to Personal Injury. his lawyer as an attorney contingency fee was not excludable from income. Third, the tax court agreed with Petitioner that Petitioner challenges on appeal the tax court’s ruling that an alimony payment to Verna Banks could have been the $464,000 he received in settling his California federal deducted from his gross income for the 1990 tax year, but it civil action was not excludable from income under Internal further held that Petitioner was now precluded by the “duty of Revenue Code § 104(a), 26 U.S.C. § 104(a). Specifically, consistency” doctrine from taking the deduction. Petitioner argues that the tax court erred in determining that no portion of the $464,000 settlement amount was attributable Consequently, the tax court held Petitioner liable for taxes to personal injuries he alleged in that lawsuit. We are not on the full $464,000 settlement amount, and it disallowed any persuaded by Petitioner’s arguments and therefore affirm the relevant deductions therefrom. A decision embodying these tax court as to this issue. Section 61 of the Internal Revenue Code states that “[e]xcept as otherwise provided in this subtitle, gross income means all income from whatever source derived.” 26 U.S.C. § 61(a). In determining what constitutes gross income, we

2 3 The No tice actually determined deficiencies for three tax years: Pursuant to these rulings (and other rulings which neither side 1988, 1990, and 1991. However, only tax year 19 90 is at issue in this appealed), the tax court ruled that there existed a deficiency for app eal. Petitioner’s 1990 tax year in the amount of $99,068.000. Nos. 01-2171/2177 Banks v. Comm’r 9 10 Banks v. Comm’r Nos. 01-2171/2177

construe § 61 “liberally ‘in recognition of the intention of To satisfy Schleier, the taxpayer must show that (1) there Congress to tax all gains except those specifically was an underlying claim sounding in tort; (2) the claim exempted.’” Greer v. United States, 207 F.3d 322, 326 (6th existed at the time of the settlement; (3) the claim Cir. 2000) (quoting Comm’r v. Glenshaw Glass Co., 348 U.S. encompassed personal injuries; and (4) the agreement 426, 430 (1955)). was executed “in lieu” of the prosecution of the tort claim and “on account of” the personal injury. Nevertheless, the Internal Revenue Code provides for a number of exclusions from income. One of these exclusions Id. at 327. is found in § 104(a)(2), which permitted a taxpayer to exclude from income “the amount of any damages received (whether Turning our attention to the first prong of the Schleier test, by suit or agreement and whether as lump sums or as periodic we observe that the proper inquiry “focus[es] on the origin payments) on account of personal injuries or sickness.” and characteristics of the claims settled in determining 26 U.S.C. § 104(a)(2).4 Damages received “on account of whether such damages are excludible under § 104(a)(2).” Id. personal injuries” are to be distinguished from those received (quoting Pipitone v. United States, 180 F.3d 859, 862 (7th on account of back pay damages, for which no exclusion from Cir. 1999)). A relevant aspect of this inquiry requires us to income exists. Comm’r v. Schleier, 515 U.S. 323, 329-30 consider whether the claim at issue provides for remedies that (1995). “recompense [a plaintiff] for any of the . . . traditional harms associated with personal injury, such as pain and suffering, The Supreme Court has held that a § 104(a) exclusion is emotional distress, harm to reputation, or other consequential warranted only where a two-prong test has been satisfied. damages,” i.e., remedies other than economic damages. See First, the taxpayer must have received the damages amount United States v. Burke, 504 U.S. 229, 239 (1992). Because through the litigation of an action (or a settlement thereof) Petitioner abandoned the state tort claims prior to trial, the based on tort or tort-type rights. Second, the amount must be relevant claims to examine in this case are Counts 1 through paid on account of personal injuries or sickness. Schleier, 3 of Petitioner’s second amended complaint, which represent 515 U.S. at 337. Moreover, regarding the second prong, a Petitioner’s claims brought under Title VII, 42 U.S.C. § 1981, taxpayer must present “concrete evidence demonstrating the and 42 U.S.C. § 1983. precise causal connection between” the taxpayer’s asserted personal injuries and the settlement payment he or she Applying this analysis, we agree with the Commissioner received. Greer, 207 F.3d at 334. More recently, we and the tax court that Petitioner’s Title VII claim does not “disaggregate[d]” the Schleier two-prong test into “its constitute “an underlying claim sounding in tort” for purposes disparate elements,” as follows: of § 104(a)(2). Greer, 207 F.3d at 327. The Supreme Court has held that Title VII, at the time of Petitioner’s civil lawsuit, “focuse[d] on legal injuries of an economic character,” given that its “sole remedial focus [wa]s the award of back wages,” 4 Section 104(a)(2) was amende d in 1996 to limit exclusions from and therefore did not “redress[] a tort-like personal injury income for personal injuries or sickness to physical injuries or sickness. within the meaning of § 104(a)(2) and the applicable See Sma ll Business Job Protection Act of 1996, Pub. L. No. 104-188, regulations.” Burke, 504 U.S. at 239, 241. It is true that § 1605 (a), 110 Stat. 17 55, 1 838 . Ho wever, because P etitioner’s lawsuit Congress amended Title VII in 1991 to provide Title VII settlement occu rred prior to the passage of this amendment, this new plaintiffs with additional monetary relief beyond back pay. limitation on § 104 (a)(2) does not apply here. See G reer, 207 F.3d at 328. Nos. 01-2171/2177 Banks v. Comm’r 11 12 Banks v. Comm’r Nos. 01-2171/2177

See Civil Rights Act of 1991, Pub. L. No. 102-166, § 102, constituting a tort or tort-like action, the Court strongly hinted 105 Stat. 1071, 1072-74 (1991) (codified at 42 U.S.C. in its Burke decision that it deemed § 1981 to fit into this § 1981a). However, Petitioner had sued the CDOE under the category. See Burke, 504 U.S. at 240 (observing that the old version of Title VII (“pre-1991 Title VII”), and Burke remedies available under pre-1991 Title VII “st[ood] in directly controls the applicability of § 104(a)(2) to pre-Title marked contrast not only to those available under traditional VII damages. Id.5 tort law, but under other federal antidiscrimination statutes,” for instance § 1981, which offered as potential remedies “both Petitioner alternatively argues that his §§ 1981 and 1983 equitable and legal relief, including compensatory and, under claims provide the requisite tort or tort-like claims on which certain circumstances, punitive damages”). to base his § 104(a)(2) exclusion. We agree with Petitioner. The Supreme Court has indicated (albeit in the statute of The tax court had rejected Petitioner’s alternative argument. limitations, not the § 104(a)(2), context) that § 1983 claims Although the court conceded that § 1981 and 1983 claims constitute tort or tort-like actions. See Wilson v. Garcia, 471 constitute tort or tort-like actions, it found that, based on the U.S. 261, 280 (1985) (holding that § 1983 claims “are best district court’s pretrial order entered in connection with his characterized as personal injury actions”); see also City of lawsuit against the CDOE, Petitioner had abandoned all of his Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. tort claims, including the §§ 1981 and 1983 claims. The tax 687, 724-25 (1999) (Scalia, J., concurring in part and court therefore concluded that Petitioner’s §§ 1981 and 1983 concurring in the judgment) (applying Wilson’s rule to a claims could not provide a basis for a § 104 exclusion because Seventh Amendment inquiry).6 Furthermore, although the such claims did not exist at the time of settlement, as required Supreme Court has not expressly designated § 1981 as by prong two of the § 104 analysis. Petitioner points to several places in the pretrial order as proof that, contrary to any ambiguous abandonment language in the pretrial order, his §§ 1981 and 1983 claims were pursued at trial and were 5 Although Burke’s authority has be en questione d since the in existence at the time of the parties’ settlement in 1990. amendm ents to Title VII, its authority as to pre-1991 Title VII claims seems to be intact. See, e.g., Abram s v. Lightolier Inc., 50 F.3d 1204, We agree with Petitioner that the tax court erred in 1220 (3d Cir. 1995) (“We note that amendments to Title VII made by the Civil Rights Act of 1991 allow a plaintiff to recover compensatory and determining that Petitioner had abandoned his 42 U.S.C. punitive damages and thus throw doubt on the continued validity of the §§ 1981 and 1983 actions. Both the “Points of Law” and the Burke holding.”) (emph asis added). “Disputed Factual Issues” sections of the pretrial order indicated that issues related to §§ 1981 and 1983 causes of 6 Several other circuits have held that § 1983 actions are tort actions action were still being litigated. Therefore, Petitioner within the meaning o f § 104 (a)(2). See Wulf v. City of Wichita, 883 F.2d satisfied his burden regarding prong one, because he had 842, 872 -73 (10th Cir.1989) (holding that the settlement proceeds of the litigated a claim sounding in tort, to wit, the §§ 1981 and taxpa yer’s § 1983 civil action compensated him for personal injuries and was excludable under § 104(a)(2)); Metzger v. Com m’r, 88 T.C. 834 1983 claims. Similarly, Petitioner also satisfied prong (1987), aff’d, 845 F.2d 1013 (3d Cir. 1988) (holding that claims under 42 number two because his §§ 1981 and 1983 claims existed at U.S.C. §§ 1981 and 1983, among others, constituted “personal injury” the time he settled his case with the CDOE, and the $464,000 claims within the meaning of § 10 4(a)(2)); Bent v. Com m’r, 835 F.2d 67, amount he received was in settlement of those claims. 70 (3d Cir. 1987) (holding that the portion of the taxpayer’s damages award pertaining to his § 1983 claim compensated him for his personal injuries and could prope rly be excluded under § 104(a)(2)). Nos. 01-2171/2177 Banks v. Comm’r 13 14 Banks v. Comm’r Nos. 01-2171/2177

As to the third prong, we find that Petitioner’s §§ 1981 and in the record. Petitioner argues that the tax court clearly erred 1983 claims “potentially involved injuries that were in failing to give appropriate weight to the characterization in personal.” Greer, 207 F.3d at 328. As we have previously the settlement agreement. observed, §§ 1981 and 1983 claims can encompass such personal injuries as mental anguish, damage to character, or We agree with Petitioner that language in a settlement damage to a personal or professional reputation, id. agreement can offer some probative evidence of how a (collecting cases), and these types of tangible and intangible settlement payment should properly be characterized for harms were contemplated by § 104(a)(2) at the time that purposes of § 104(a)(2). See, e.g., Bent v. Comm’r, 87 T.C. Petitioner’s settlement agreement was executed. Petitioner 236, 246 (1986), aff’d, 835 F.2d 67, 70 (3d Cir. 1987). specifically requested in his second amended complaint, However, in this case the settlement agreement did not among other forms of relief, general damages (for harassment, attempt to assess the damages of the lawsuit and allocate humiliation, and embarrassment suffered by Plaintiff), and Petitioner’s recovery accordingly. See Robinson v. Comm’r, future medical and hospital expenses. Any relief granted for 102 T.C. 116, 128-29 (1994) (rejecting a settlement these harms Plaintiff suffered could fairly be construed as agreement’s characterization of the settlement amount, which compensating personal injuries within the meaning of allocated 95% to mental anguish and 5% to lost profits, as § 104(a)(2). See id. “uncontested, nonadversarial, and entirely tax-motivated” and not accurately “reflect[ing] the realities of . . . [the parties’] However, we find that Petitioner failed to meet his burden settlement”). In the present case, Petitioner can point to no to show that the settlement agreement was executed “on other evidence in the record that supports his characterization account of personal injuries or sickness.” Greer, 207 F.3d at of the settlement payment. For instance, his second amended 334 (quoting Schleier, 515 U.S. at 330) (internal quotation complaint sought general damages for future (presumably, marks omitted). Our inquiry in this regard requires us to anticipated) medical and hospital expenses, but at the time of examine the settlement agreement’s purpose and, absent a settlement he offered no receipts or other information clear purpose, the payor’s intent in settling the claims. Greer, indicating that he had suffered medical expenses or intended 207 F.3d at 329 (citations omitted). A determination to do so in the near future. Similarly, there is nothing in the regarding a payor’s intent requires us to “consider[] the record to reflect a numerical value Petitioner placed on his amount paid, compar[e] the circumstances and amount paid mental anguish. Indeed, the settlement agreement does not to other agreements the company has entered into, consider[] even indicate the CDOE’s intent in paying the settlement the factual circumstances that led to the agreement, and amount; the agreement merely indicates that Petitioner weigh[] other facts that may reveal the employer’s intent.” characterizes the $464,000 payment as compensating him for Greer, 207 F.3d at 329 (citing Pipitone, 180 F.3d at 864-65). personal injuries. The only intent on CDOE’s part reflected in the record is its intent to dispose of the case in an In support of his contention that he satisfied the burdens set expeditious manner and a willingness to acquiesce in forth under the third and fourth prongs, Petitioner points to Petitioner’s tax-favorable characterization of the settlement language in the settlement agreement, to wit, “[Petitioner] proceeds. Petitioner’s characterization of his own settlement characterizes this payment of $464,000.00 as payment for payment, with no further support in the settlement agreement personal injury damages suffered after [Petitioner’s] discharge or elsewhere record, cannot control the issue. on July 14, 1986.” (J.A. at 159.) The tax court rejected this language as self-serving and contradicted by other evidence Nos. 01-2171/2177 Banks v. Comm’r 15 16 Banks v. Comm’r Nos. 01-2171/2177

Not only does Petitioner fail to point to any evidence in the B. Whether the Portion of Petitioner’s Lawsuit record to support his characterization of the $464,000 Settlement Paid to His Attorney Under a Contingency settlement payment, the record contains several indicia Fee Arrangement was Excludable from Income. tending to contradict Petitioner’s characterization. In particular, the pretrial order pertaining to Petitioner’s Next, Petitioner argues that the tax court erred in holding California federal court lawsuit stated that the only “[r]elief that the $150,000 in contingency fees he paid to his attorney [s]ought” at trial was “reinstatement, back pay, and attorneys’ as part of the California federal court settlement was not fees.” (J.A. at 147.) This would suggest that the claim, at excludable from his gross income. Petitioner specifically least at the time of settlement, no longer encompassed contends that the tax court’s ruling in this regard contravened personal injuries, and that the settlement agreement was our precedent. The Commissioner argues that the tax court executed on account of non-personal injuries, to wit, acknowledged our precedent but properly distinguished it economic injuries. Moreover, testimony from Petitioner’s based on differing facts. We agree with Petitioner and reverse lawyer, as well as a letter from Petitioner to an IRS agent, the tax court’s determination as to this issue. indicated that Petitioner offered to settle for $850,000, a figure he computed based on salary, which represents There is a circuit split on the issue of whether contingency economic damages as opposed to personal injuries. Petitioner fees must be included in gross income.7 The Commissioner nevertheless agreed to the defendants’ counteroffer of has always taken the position that contingency fees must be $464,000, so long as he could characterize the payment included, based on the anticipatory assignment of income amount in the settlement agreement as covering personal doctrine. This theory is most typically exemplified in two injuries. Based on the evidence favoring the Commissioner, Supreme Court cases: Lucas v. Earl, 281 U.S. 111 (1930), the tax court’s finding on this point was not clearly erroneous, and Helvering v. Horst, 311 U.S. 112 (1940). In Lucas, the and we decline to overturn it. taxpayer assigned one-half of his future salary to his wife to avoid paying taxes on the entire salary, and argued in We agree with the Commissioner that the 1990 settlement litigation that because he had never actually received the of Petitioner’s California federal court action against the income before distributing it to his wife, it was not income to CDOE and other defendants for $464,000 does not fall under him. The Supreme Court disagreed, reasoning that because the § 104(a)(2) exclusion from income. Although some of the taxpayer had earned and created the right to receive and Petitioner’s claims, at the time of the settlement, were “based enjoy the benefit of the income before assigning it, he was upon tort or tort type rights,” Schleier, 515 U.S. at 337, Petitioner failed to meet his burden of showing that his 7 §§ 1981 and 1983 claims were settled on account of his The Fifth, Sixth, and E leventh Circuits have held that contingency personal injuries. Specifically, Petitioner has not met his fees are exclud able. See Foster v. U nited States, 249 F.3d 1275 (11th Cir. burden of establishing a causal connection between his 2001); Srivastava v. Com m’r, 220 F.3d 353 (5th C ir. 200 0); Estate of Clarks v. United States, 202 F.3d 8 54 (6th Cir. 2000). T he Third, Fourth, $464,000 settlement payment and any personal injuries he Seventh, Ninth, Tenth, and Federal Circuits have taken the opposite view. may have suffered. Because the settlement amount could not See Cam pbell v. Co mm ’r, 274 F.3d 1312 (10th Cir. 200 1); Kenseth v. be excluded under § 104(a)(2), it was properly included as Com m’r, 259 F.3d 881 (7th Cir. 2001); Young v. Com m’r, 240 F.3d 369 income under 26 U.S.C. § 61(a). We therefore affirm the tax (4th Cir. 200 1); Benci-Woo dwa rd v. Comm ’r, 219 F.3d 9 41 (9th Cir. court’s determination on this issue. 2000); Coa dy v. Co mm ’r, 213 F.3d 118 7 (9th Cir. 2000 ); Baylin v. United States, 43 F.3d 1451 (Fed . Cir. 19 95); O’B rien v. Com m’r, 38 T.C. 707 (1962), aff’d, 319 F.2d 5 32 (3d C ir. 1963) (per curiam). Nos. 01-2171/2177 Banks v. Comm’r 17 18 Banks v. Comm’r Nos. 01-2171/2177

subject to taxation on the entire salary. 281 U.S. at 114-15. Nevertheless, the first case to address the tax treatment of The Court further emphasized that the fundamental purpose contingency fee arrangements declined to apply the of the tax code–to tax income to those who create, earn and assignment of income doctrine to contingency fee payments. enjoy it– “could not be escaped by anticipatory arrangements In Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), and contracts however skilfully devised to prevent the salary following a successful Alabama court lawsuit to enforce a when paid from vesting even for a second in the man who contract, the taxpayer paid her legal counsel a portion of the earned it.” Id. at 115. Thus, the Court declined to honor judgment award, pursuant to a contingency fee arrangement attempts to attribute fruits “to a different tree from that on between them. The Commissioner subsequently treated the which they grew” and held the entire salary, not just half, taxpayer’s entire judgment award, including the contingency constituted taxable income to the taxpayer. Id. fee portion, as taxable income and assessed tax deficiencies accordingly. The court held that the contingency fee portion Similarly, in Horst, the taxpayer owned negotiable bonds. of the judgment award was not income to the taxpayer. In Shortly before their maturity date, he removed the interest concluding that the anticipatory assignment of income coupons from the bonds and gave them to his son, who doctrine did not apply to the contingency fee the taxpayer subsequently collected interest on them. 311 U.S. at 114. paid to her legal counsel, the Cotnam court looked to During litigation, the taxpayer argued that the interest Alabama’s attorney’s lien statute, which at the time provided payments were not taxable to him because he never received that the interest payments. Again, the Supreme Court disagreed. Observing that “[t]he dominant purpose of the revenue laws [u]pon suits, judgments, and decrees for money, is the taxation of income to those who earn or otherwise [attorneys] shall have a lien superior to all liens but tax create the right to receive it and enjoy the benefit of it when liens, and no person shall be at liberty to satisfy said suit, paid,” it concluded that the tax established by the 1934 judgment or decree, until the lien or claim of the attorney Revenue Act could not “fairly be interpreted as not applying for his fees is fully satisfied; and attorneys at law shall to income derived from interest or compensation when he have the same right and power over said suits, judgments who is entitled to receive it makes use of his power to dispose and decrees, to enforce their liens, as their clients had or of it in procuring satisfactions which he would otherwise may have for the amount due thereon to them. procure only by the use of the money when received.” Id. at 119 (alterations in original). Therefore, the Court reasoned, Id. at 125 n.5 (citing Ala. Code § 64 (1940)). In other words, because the taxpayer had earned and created the right to the Cotnam court reasoned, the statute provided an attorney receive and enjoy the benefit of the income by virtue of the with an equitable lien that effectively transferred part of the fact that he owned the bonds and the interest generated taxpayer’s claim to the attorney. The practical consequence therefrom was guaranteed to him when he transferred the of Alabama’s attorney’s lien law was that an attorney in coupons, the income could fairly be attributed to him for Alabama held an equity interest in both the cause of action taxation purposes. Id. at 117-20. Again reasoning that “the and the judgment, and the taxpayer, as the client, was fruit is not to be attributed to a different tree from that on precluded from ever realizing income on that percentage of which it grew,” id. at 120 (citing Lucas, 281 U.S. 115), the the judgment representing the contingency fee. Court held that the transferred coupons constituted taxable income to the taxpayer. Id. The Cotnam court declined to apply the anticipatory assignment of income doctrine, noting that, unlike the Nos. 01-2171/2177 Banks v. Comm’r 19 20 Banks v. Comm’r Nos. 01-2171/2177

circumstances in Lucas and Horst, the attorneys’ claim to litigation claim, was not already earned, vested, or even payment lacked fair market value and that it was uncertain as relatively certain to be paid to the assignor, but instead was to when or whether the attorneys’ claim would attain value merely “an intangible, contingent expectancy,” dependent (given that contingency fees are only paid in the event of a upon the attorney’s skills to realize any value from it. Id. at successful outcome of the taxpayer’s lawsuit). Indeed, the 857. We then compared the contingency fee arrangement to court noted, the claim was “worthless without the aid of a division of property: skillful attorneys.” Id. at 125. Therefore, the Cotnam court concluded, because (1) the contingency fee never passed Here the client as assignor has transferred some of the through the taxpayer’s hands or was controlled by the trees in his orchard, not merely the fruit from the trees. taxpayer, and (2) only the attorney’s services resulted in The lawyer has become a tenant in common of the converting the uncertain claim into an item of value, the orchard owner and must cultivate and care for and taxpayer properly excluded the contingency fee portion of his harvest the fruit of the entire tract. Here the lawyer’s judgment from his income. Id. at 127. income is the result of his own personal skill and judgment, not the skill or largess of a family member We adopted the Cotnam doctrine in Estate of Clarks v. who wants to split his income to avoid taxation. The United States, 202 F.3d 854 (6th Cir. 2000). In that case, the income should be charged to the one who earned it and taxpayer received a jury award in a Michigan state court received it, not . . . to one who neither received it nor personal injury suit, and the attorney received one-third of the earned it. judgment award and interest as a contingency fee. The taxpayer soon thereafter died, and the estate, when filing the Id. at 858. taxpayer’s income tax return, properly included in gross income the interest portion of the judgment, but excluded the We then distinguished Earl and Horst on three additional portion of the amount contingency fee attributable to interest. grounds. First, unlike the true income assignments in Earl Id. at 855. In holding that the exclusion was proper, we and Horst, no tax avoidance purpose motivated the rejected the Commissioner’s position for reasons similar to contingency fee arrangement; rather a business purpose those articulated in Cotnam. First, we pointed out that motivated it. Id. at 858. Second, unlike the Earl and Horst Michigan’s attorney lien law operates in essentially the same assignees who performed no services to earn their income, the way as the Alabama statutory lien examined in Cotnam, and attorney earned his income because the income resulted from essentially amounted to an assignment of a portion of the his own skill and judgment. We also were motivated by the potential judgment. The record had indicated that the client fact that applying the assignment of income doctrine to originally owned the underlying claim but then relinquished contingency fees would result in double taxation, whereas in his right to receive payment for the lawyer’s contingency fee Earl and Horst, the assignees could exclude what they portion of any judgment upon signing the contingency fee received as gifts. Id. at 857, 858. contract. In the instant case, the tax court acknowledged the Estate Like the Cotnam court, we then proceeded to reject the of Clarks decision but distinguished it on the grounds that anticipatory assignment of income doctrine as applied to Petitioner’s underlying lawsuit, from which his attorney’s contingency fees. In distinguishing the Earl and Horst contingency fee was generated, took place in California. decisions, we reasoned that a contingency fee, as part of a California’s law on attorneys’ contingency fees, unlike Nos. 01-2171/2177 Banks v. Comm’r 21 22 Banks v. Comm’r Nos. 01-2171/2177

Alabama’s law, does not operate under a lien theory. Rather, “that the Internal Revenue Code was intended to turn upon California’s lien statute confers no ownership interest on such refinements”). attorneys, and “[c]ontingent fee contracts ‘do not operate to transfer a part of the cause of action to the attorney but only More importantly, the reasoning in Estate of Clarks case give him a lien upon his client's recovery.’” Benci- seems to have been based on more than the nature of Woodward, 219 F.3d at 943 (citations omitted). Thus, in Michigan’s lien law. To be sure, the similarity between California an attorney who is entitled to a contingency fee Michigan’s attorney’s lien statute in Estate of Clarks and “acquires no more than a professional interest,”id., and is no Alabama’s attorney’s lien statute in Cotnam played a role in different from an ordinary creditor who, if “stiffed” on his the outcome. Estate of Clarks, 202 F.3d at 856. However, payment, would have to enforce the contract judicially. On we found other factors persuasive in distinguishing appeal, Petitioner urges this Court not to draw distinctions contingency fees from Lucas and Horst, including the based on the lien theory of the particular state in which an following: (1) the fact that the claim, at the time the action arises. We agree with Petitioner. contingency fee agreement was signed, was “an intangible, contingent expectancy,” (2) taxpayer’s claim was like a We find persuasive the reasoning of the Fifth Circuit, which partnership or joint venture in which the taxpayer assigned recently faced similar factual circumstances. In Srivastava v. away one-third in hope of recovering two-thirds; (3) no tax- Comm’r, 220 F.3d 353, 363-64 (5th Cir. 2000), the avoidance purpose was at work with the contingency fee Commissioner argued that Cotnam was not controlling arrangement, as there ostensibly was in Lucas and Horst; and because the taxpayer’s contingency fee agreement was (4) double taxation would otherwise result by including the controlled by Texas law, and Texas’ attorney’s lien statute did contingency fee in taxpayer’s income. Id. at 857-58. not provide attorneys with a superior claim lien against their clients’ judgments or any ownership interests. The Srivastava The Estate of Clarks holding does not primarily rest on the court declined to distinguish Cotnam based on the differing rationale that separate state lien laws governing attorneys’ state attorney’s lien laws, instead determining that “the rights determine the correct characterization of an attorney answer [as to whether to apply Cotnam] does not depend on contingency fee. We therefore hold that Estate of Clarks is the intricacies of an attorney’s bundle of rights against the controlling in the present case, notwithstanding the difference opposing party under the law of the governing state.” Id. at in Michigan’s and California’s respective attorney’s lien laws. 364. We likewise are not inclined to draw distinctions In so holding, we will follow our precedent without protracted between contingency fees based on the attorney’s lien law of inquiries into “the intricacies of an attorney’s bundle of the state in which the fee originated. Given the various rights.” Srivastava, 220 F.3d at 364. The nature of distinctions among attorney’s lien laws among the fifty states, Petitioner’s attorney’s rights notwithstanding, the facts of this such a “state-by-state” approach would not provide reliable case are within the scope Estate of Clarks contemplated: By precedent regarding our adherence to the Cotnam doctrine or signing the contingency fee agreement, Petitioner transferred provide sufficient notice to taxpayers as to our tax treatment some of the trees from the orchard, rather than simply of contingency-based attorneys fees paid from their respective transferring some of the orchard’s fruit. Estate of Clarks, 202 jury awards. Cf. O’Brien v. Comm’r, 38 T.C. 707, 712 F.3d at 858. (1962), aff’d, 319 F.2d 532 (3d Cir. 1963) (per curiam) (rejecting distinctions in applying the Cotnam doctrine, based We therefore hold that Estate of Clarks is not upon differing state attorney’s lien laws because it doubted distinguishable based on the distinctions between California’s Nos. 01-2171/2177 Banks v. Comm’r 23 24 Banks v. Comm’r Nos. 01-2171/2177

attorney’s lien law and Michigan’s lien law. Thus, consistent 68, at *29. On appeal, Petitioner asserts that this ruling was with our prior precedent in Estate of Clarks, we hold that the erroneous as a matter of law. Because the tax court failed to $150,000 Petitioner paid in contingency fees to his attorney follow our precedent as to the “duty of consistency” rule, we is excludable from his gross income. Because the tax court reverse the tax court’s ruling with respect to this issue and erred in determining that the $150,000 was not excludable, we remand for further consideration. reverse the tax court as to this issue. The “‘duty of consistency’ rule prevents a taxpayer who has C. Whether the Tax Court Properly Denied Petitioner’s already had the advantage of a past misrepresentation–in a 1990 Alimony Deduction Pursuant to the “Duty of year now closed to review by the government–from changing Consistency” Doctrine. his position and, by claiming he should have paid more tax before, avoiding the present tax.” Lewis v. Comm’r, 18 F.3d Finally, Petitioner appeals the tax court’s ruling regarding 20, 26 (1st Cir. 1994) (citing Beltzer v. United States, 495 the deductibility of his alimony payments. At trial, Petitioner F.2d 211, 212-13 (8th Cir. 1974)). When this situation arises, had sought to claim as a deduction for the 1990 tax year the “the Commissioner may act as if the previous representation, $72,013.62 alimony payment he made to Verna Banks. He on which he relied, continued to be true, even if it is not. The had argued that although he took the deduction in 1993 (when taxpayer is estopped to assert the contrary.” Eagan v. United the California Superior Court had transferred the funds to States, 80 F.3d 13, 17 (1st Cir. 1996). The rule’s purpose is Verna), because he had paid the funds into court in 1990 he to “preclude[] parties from ‘playing fast and loose with the should have taken the deduction then, pursuant to § 461(f) of courts’” by taking a position in a given tax year, then taking the Internal Revenue Code, 26 U.S.C. § 461(f).8 In denying a contrary position once the statute of limitations has run on Petitioner the deduction, the tax court had agreed with that taxable year. Estate of Ashman v. Comm’r, 231 F.3d 541, Petitioner that an alimony deduction would properly have 543 (9th Cir. 2000) (quoting Russell v. Rolfs, 893 F.2d 1033, been taken in 1990. However, the tax court continued, 1037 (9th Cir. 1990)). because the Commissioner was now precluded by the § 6501 statute of limitations from adjusting Petitioner’s 1993 tax The controlling case on this doctrine is Crosley Corp. v. year, the duty of consistency doctrine prevented Petitioner United States, 229 F.2d 376 (6th Cir. 1956), which instructs from “taking one position on one tax return and a contrary that for the “duty of consistency” doctrine to apply, position on another return for which the limitation period has run.” 81 T.C.M. (CCH) 1219, 2001 Tax Ct. Memo LEXIS the taxpayer by his conduct must knowingly make a representation or conceal a material fact which he intends or expects will be acted upon by taxing officials in 8 determining his tax, and the true or concealed material Section 461 provides a deduction for p ayment of alimony. facts are unknown to the taxing officials or they lack Specifically, § 461 (f) provides that whe re the alimony pa yment is a equal means of knowledge with the taxpayer, and act on “contested liability,” then a transfer o f such co ntested funds is deductible if the following four criteria are me t: (1) taxpayer contests an asserted his representation or concealment, and to retrace their liability, (2) he transfers money or other property to provide for the steps on a different state of facts would cause loss of satisfaction of such liability, (3) the contested na ture of the liability still taxes to the Government. A material factor is the exists after the transfer has been completed, and (4) but for the fact that availability of the necessary facts to the parties involved. the asserted liability is contes ted, a deduction would be allowed in the taxable year of the transfer. 26 U.S.C. § 46 1(f). Nos. 01-2171/2177 Banks v. Comm’r 25 26 Banks v. Comm’r Nos. 01-2171/2177

Id. at 380-81. Additionally, “[e]stoppel is an affirmative made no findings as to these issues. Instead, it declared that defense and the burden of proof is on the person asserting it.” because 1993 was a closed tax year and the circumstances Id. at 381 (citing Helvering v. Brooklyn City R.R. Co., 72 F.2d satisfied all the elements of the “duty of consistency” rule, 274, 275 (2d Cir. 1934)). In Crosley, the taxpayer had Petitioner was precluded from arguing the deductibility of the erroneously deducted certain expenses over one year, instead alimony payment as to the 1990 tax year. However, aside of capitalizing them over two years. He therefore filed a from noting that 1993 was a closed tax year, the court did not claim for refund with respect to the lost year. Id. at 378. The address the other elements of the “duty of consistency” rule district court granted summary judgment in favor of the as articulated in Crosley, most particularly our requirement government based on the duty of consistency doctrine. We that Petitioner seeks to make a contrary factual representation, reversed, noting that “[t]here was no misrepresentation of any as opposed to correcting an earlier erroneous interpretation of fact by the taxpayer,” id. at 381, and that, “[u]nder the facts the law. Thus, it appears that the tax court was applying a which were known to the Commissioner, or were readily standard other than the standard established by Crosley. available to him, it was a question of law whether the Application of a rule contrary to our own is erroneous, deduction was properly taken in 1939 or should have been because the tax court is bound to follow Sixth Circuit treated as a capital expenditure. A mutual mistake of law on precedent. See Golsen v. Comm’r, 54 T.C. 742, 756-57 the part of the taxpayer and the Commissioner in treating it as (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). We therefore a cost of manufacturing does not create an estoppel.” Id. We hold that the tax court must reconsider this issue in light of therefore reversed the judgment and remanded for further our precedent in Crosley. proceedings. Id. 9 The Commissioner invites us to affirm the tax court’s The Crosley case controls the present matter and mandates denial of a § 461 deduction to Petitioner on the alternative a reversal of the tax court’s finding on this issue. We note ground that Petitioner failed to establish on the record that his that the tax court made no finding that Petitioner engaged in $72,013 payment constituted alimony within the meaning of a misrepresentation, as Crosley requires. Moreover, as § 71(b). The Commissioner argues that Petitioner failed to Petitioner correctly asserts, his mistake in taking the alimony meet the § 71 standard because the record indicates that deduction in 1993 instead of 1990 was a mistake of law, not Petitioner’s payments were for Verna’s divisible community of fact. Finally, there is an open issue as to whether the property share of Petitioner’s military retirement benefits, and Commissioner had the same facts on hand as did Petitioner that this really was “a non-deductible division of community when he took the § 461 deduction in 1993. The tax court property between the divorced spouses.” (Commissioner’s Br. at 45.) The Commissioner adds that the $72,013 represented security for satisfaction of the arrears on Verna’s 9 payments, but also attorney’s fees, which are not deductible. Oth er circuits similarly have required that evidence of a misrepresentation be presented in order for the duty of consistency doctrine to apply. See, e.g., Ea gan , 80 F.3d at 17 (“The duty of We decline the Commissioner’s invitation. First of all, it consistency arises when the following elements are present: ‘(1) a does not appear that the Commissioner contested at the tax representation or report by the taxpayer; (2) on which the Commissioner court trial the issue of whether Petitioner’s $72,013 payment has relied; a nd (3) an attempt by the taxpayer after the statute of to his former spouse constituted alimony within the meaning limitations has run to change the previous representation or to of § 71. Moreover, although the tax court indicated that recharacterize the situation in such a way as to harm the Commissioner.’”) (quoting Herring ton v. Co mm ’r, 854 F.2d 755 , 758 (5th C ir. 198 8)). Petitioner should have taken the § 461 deduction in 1990 as Nos. 01-2171/2177 Banks v. Comm’r 27 28 Banks v. Comm’r Nos. 01-2171/2177

opposed to 1993, the tax court did not elaborate on the on the “duty of consistency” doctrine. We REMAND this analysis, and in particular the tax court offered no detailed case to the tax court for further consideration consistent with discussion as to whether the $72,013 payment constituted this opinion. alimony within the meaning of § 71, as required by § 461. Therefore, while the Commissioner may be correct as to the proper characterization of the $72,013 payment, it is not clear on the present record whether the tax court made a specific factual finding as to whether Petitioner’s $72,013 payment constituted § 71 alimony, or whether the court was assuming arguendo that the $72,013 payment constituted alimony for purposes of rejecting Petitioner’s argument based on the “duty of consistency” doctrine. Further, it is not clear on this record whether such a finding was erroneous, if indeed the tax court made such a finding. We are not inclined, on this limited record, to determine the character of the $72,013 payment or the propriety of a § 461 deduction (notwithstanding the “duty of consistency” doctrine) in reviewing the tax court’s ultimate resolution of the issue. Because the tax court did not follow our precedent in Crosley in determining that the doctrine of consistency applies, we reverse the tax court’s denial of the § 461 deduction Petitioner seeks. However, on remand, the tax court, if it deems appropriate, may revisit the issue of whether the $72,013 payment constituted alimony within the meaning of § 71. In making this determination, the court may consider any new evidence the Commissioner or Petitioner wishes to present on the issue. IV. CONCLUSION For the foregoing reasons, we AFFIRM the tax court’s decision that Petitioner’s California federal court suit settlement proceeds were not excludable from gross income under 26 U.S.C. § 104. However, we REVERSE the tax court’s determination that the contingency fees Petitioner paid to his attorney constituted taxable income, and we REVERSE the tax court’s ruling that Petitioner could not deduct his alimony payments for the 1990 taxable year based Nos. 01-2171/2177 Banks v. Comm’r 29 30 Banks v. Comm’r Nos. 01-2171/2177

______________________________________________ disagree with the majority’s assessment that the Tax Court did not appear to apply our half-century-old case, Crosley CONCURRING IN PART, DISSENTING IN PART Corp. v. United States, 229 F.2d 376 (6th Cir. 1956), and that ______________________________________________ the Tax Court did not appear to make any relevant factual findings. Therefore I do not disagree with remanding this KAREN NELSON MOORE, Circuit Judge, concurring in issue to the Tax Court for further proceedings. I note that this part and dissenting in part. Although I agree with much of case seems to me to be one where the duty of consistency the majority’s thoughtful opinion, I write separately to applies, because the taxpayer has unique knowledge regarding express my disagreement regarding the contingency-fee issue. the nature and timing of his payments for his ex-wife, such that he should not be able to take one position on one tax As the majority holds, we are bound by our circuit’s recent return and a diametrically opposite position on another return decision in Estate of Clarks v. United States, 202 F.3d 854 on which the statute of limitations has run against the (6th Cir. 2000), which held that the lawyer’s contingency fee government. I suggest that in revisiting this issue, the Tax operated as a lien on the client’s recovery that under Court is free to determine whether there was a representation Michigan law transferred part of the ownership of the client’s by the taxpayer as well as to evaluate the other requirements claim to the attorney, such that the client never realized that comprise our version of the duty of consistency. I agree income on the contingency-fee part of the judgment. We are with the majority that on remand the Tax Court also may dealing here, however, not with Michigan law but with address the underlying question whether the payment even California law regarding the characterization of the lawyer’s constituted § 71 alimony at all. contingency-fee interest in taxpayer Banks’s employment- related claim. California’s law has been authoritatively and Finally, I concur fully in the majority’s determinations that persuasively construed by a panel of the Ninth Circuit in the taxpayer’s characterization of the settlement proceeds as Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir. payment for personal injuries is worth no weight and that the 2000), which held that, “[u]nder California law, an attorney Tax Court properly determined that no portion of the lien does not confer any ownership interest upon attorneys or settlement amount was attributable to personal injuries. grant attorneys any right and power over the suits, judgments, or decrees of their clients.” Id. at 943 (relying on Isrin v. Superior Court, 403 P.2d 728, 732, 733 (Cal. 1965)). California law, as explained by the California Supreme Court and the Ninth Circuit, clearly treats the attorney’s contingency-fee contract as simply a security interest and not as an ownership interest. Thus I would affirm the Tax Court’s ruling here that the proceeds the taxpayer paid to his attorney as a contingency fee should be included in the taxpayer’s income. See also Srivastava v. Commissioner, 220 F.3d 353, 367-69 (5th Cir. 2000) (Dennis, J., dissenting). Regarding the issue of the deductibility of the taxpayer’s payments to his ex-wife and the duty of consistency, I do not