Davis v. Comr. of IRS

210 F.3d 1346

• Court: Court of Appeals for the Eleventh Circuit
• Decided: April 27, 2000
• Docket: 98-7026
• Status: Published

Opinion

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS FILED FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS ELEVENTH CIRCUIT APR 27 2000 ________________________ THOMAS K. KAHN CLERK No. 98-7026 ________________________

D. C. Docket No. 4077-96

WILLIE MAE BARLOW DAVIS,

Petitioner-Appellee,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellant.

________________________

Appeal from a Decision of the United States Tax Court _________________________ (April 27, 2000)

Before ANDERSON, Chief Judge, COX and HULL, Circuit Judges.

PER CURIAM:

This case presents the issue of whether the portion of a judgment paid directly

to the taxpayer’s attorneys pursuant to a contingency fee arrangement is taxable as

income to the taxpayer. I. FACTS AND PROCEEDINGS BELOW

In 1992, Willie Mae Davis prevailed in a suit against a mortgage company

and won a $6,151,000 judgment, of which six million dollars was punitive

damages. She had entered into a contingency fee arrangement with her attorneys

in 1989 and upon receiving the judgment, they retained $3,111,809 and she

received $3,039,191. Initially, Ms. Davis did not report any of the award as

income in 1992 and upon audit, the Internal Revenue Service (“IRS”) determined

that the entire six million dollar punitive damages award should be included as

income.1 The IRS allowed Ms. Davis a deduction for attorneys’ fees and costs in

the amount of $3,069,250 and determined that Ms. Davis had a deficiency of

$1,441,736.

Ms. Davis petitioned the Tax Court for a redetermination of the deficiency.

The Tax Court found that although the punitive damages were otherwise taxable as

income, the amount paid to her attorneys was not taxable income under Cotnam v.

1 The compensatory damages of $151,000 were excludable because they were damages received on account of personal injuries. See O’Gilvie v. United States, 519 U.S. 79, 117 S. Ct. 452 (1996).

2 Commissioner, 263 F.2d 119 (5th Cir. 1959).2 Thus the Tax Court determined that

Ms. Davis’s tax deficiency was $919,772.3 The IRS appeals.

II. STANDARD OF REVIEW

We review de novo the tax court’s conclusions of law and findings of fact

for clear error. See Sleiman v. Commissioner, 187 F.3d 1352, 1358 (11th Cir.

1999).

III. DISCUSSION

This Court has previously addressed the issue of whether a taxpayer is taxed

on the portion of a judgment paid to the attorneys under a contingency fee

arrangement in Alabama, and in light of the attorneys’ lien statute in Alabama, Ala.

Code § 34-3-61 (1997). In Cotnam v. Commissioner, the former Fifth Circuit

found that a woman, who obtained a judgment on her oral contract with a man to

care for him in return for a fifth of his estate, was not required to include as income

the portion of the award paid to her attorneys for their work in enforcing that

2 In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this Court adopted as binding precedent all of the decisions of the former Fifth Circuit handed down prior to the close of business on September 30, 1981. 3 The deduction for attorneys’ fees and costs which the IRS allowed was less favorable to the taxpayer than the exclusion-from-income approach adopted by the Tax Court because the operation of technical tax rules such as the alternative minimum tax.

3 contract. Because Cotnam is squarely on point and controlling, as the IRS

acknowledges, we affirm the Tax Court on this issue.4

Next, the IRS argues, in the alternative, that Ms. Davis made a taxable

disposition of her property in 1989 when she entered into the contingency fee

arrangement. Reasoning that the court’s interpretation of the Alabama attorneys’

lien statute in Cotnam gave an ownership interest in the claim to Ms. Davis’s

attorneys, the IRS argues that by entering into the fee arrangement agreement, Ms.

Davis in essence sold part of her cause of action in 1989. Realizing that that

taxable event in 1989 would be time-barred, the IRS suggests that the value of the

cause of action and the value of the attorneys’ services were unascertainable in

1989, and thus that the taxable event should be deferred pursuant to the open

transaction doctrine. The open transaction doctrine, introduced in Burnet v. Logan,

283 U.S. 404, 51 S. Ct. 550 (1931), permits a delay in the assessment of the value

of the property until the sum is made certain. Thus, under this logic, the IRS

argues that Ms. Davis’s taxes should not be assessed until 1992 when she received

her judgment, and the value of the attorneys’ services and her claim became

apparent.

4 The IRS’s primary argument is that Cotnam was wrongly decided and should be overruled. We need not address this argument because this panel is bound by Cotnam, which can be overruled only by the en banc court. See United States v. Woodard, 938 F.2d 1255, 1258 (11th Cir.1991).

4 The open transaction doctrine is only applicable when it is not possible to

discern the value of either of the assets exchanged. Under United States v. Davis,

370 U.S. 156, 82 S. Ct. 1190 (1962), when only one of the assets has an

unascertainable value, it is presumed to be of the same worth as the property for

which it was exchanged. The IRS concedes that it bore the burden of showing that

the open transaction doctrine applied and that the values of the properties

exchanged were not ascertainable at the time of the exchange. Because the IRS

provided no proof that the values of either the cause of action or the attorneys’

services were unascertainable, it has failed to establish that the open transaction

doctrine should apply.5

Because we find that Cotnam v. Commissioner is controlling and that the

IRS failed to bear its burden of proof on its open transaction argument, we affirm

the decision of the Tax Court.

AFFIRMED.

5 In light of this disposition, we of course need not decide whether there was a taxable event in 1989.