Kenseth v. Commissioner

114 T.C. No. 26, 114 T.C. 399, 2000 U.S. Tax Ct. LEXIS 32, 82 Fair Empl. Prac. Cas. (BNA) 1812

Opinions

Ruwe, Judge:

Footnotes

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Respondent determined a deficiency of $55,037 in petitioners’ 1993 Federal income tax. The sole issue for decision is whether petitioners’ gross income includes the portion of thie settlement proceeds of a Federal age discrimination claim that was paid as the attorney’s fees of Eldon R. Kenseth (petitioner) pursuant to a contingent fee agreement.

FINDINGS OF FACT

The parties have stipulated some of the facts, and the stipulations of facts and the attached exhibits are incorporated in this opinion. At the time of filing their petition, petitioners resided in Cambridge, Wisconsin.

In a complaint filed with the Wisconsin Department of Industry, Labor, and Human Relations (dilhr) in October 1991, petitioner alleged that on March 27, 1991, APV Crepaco, Inc. (APV), terminated his employment. The complaint also alleged that, at the time of his discharge, petitioner was 45 years old, held the position of master scheduler, was earning $33,480 per year, and had been employed by APV for 21 years. It further alleged that, around the time of petitioner’s discharge, APV did not terminate younger employees also acting as master schedulers but did terminate other employees over age 40.

Prior to filing the DILHR complaint, petitioner and 16 other former employees of APV (the class) retained the law firm of Fox & Fox, S.C. (Fox & Fox), to seek redress against APV. In July 1991, petitioner executed a contingent fee agreement with Fox & Fox that provided for legal representation in his case against APV. Each member of the class entered into an identical contingent fee agreement with Fox & Fox.

The contingent fee agreement was a form contract prepared and routinely used by Fox & Fox; the client’s name was manually typed in, but the names of Fox & Fox and APV had already been included in preparing the form used for all the class members. Fox & Fox would have declined to represent petitioner if he had not entered into the contingent fee agreement and agreed to the attorney’s lien provided therein.

The contingent fee agreement provided in relevant part:¹

FOX & FOX, S.C.

CONTINGENT FEE AGREEMENT: (Case involving Statutory Fees)

II. CLIENT TO PAY LITIGATION EXPENSES

The client will pay all expenses incurred in connection with the case, including charges for transcripts, witness fees, mileage, service of process, filing fees, long distance telephone calls, reproduction costs, investigation fees, expert witness fees and all other expenses and out-of-pocket disbursements for these expenses according to the billing policies and procedures of FOX & FOX, S.C. The client agrees to make payments against these bills in accordance with the firm’s billing policies.

III. THE ATTORNEYS’ FEES WHERE THERE IS NO SEPARATE PAYMENT OF ATTORNEYS’ FEES

In the event that there is recovered in the case a single sum of money or property including a job that can be valued in monetary advantage to the client, either by settlement or by litigation, the attorneys’ fees shall be the greater of:

A. A reasonable attorney’s fee in a contingent case, which shall be defined as the attorneys’ fees computed at their regular hourly rates, plus accrued interest at their regular rate, plus a risk enhancer of 100% of the regular hourly rates (but in no event greater than the total recovery), or:

B. A contingency fee, which shall be defined as:

Forty percent (40%) of the recovery if it is recovered before any appeal is taken;

Forty-Six percent (46%) of the recovery if it is recovered after an appeal is taken.

Any settlement offer of a fixed sum which includes a division proposed by the offeror between damages and attorneys’ fees shall be treated by the client and the attorneys as an offer of a single sum of money and, if accepted, shall be treated as the recovery of a single sum of money to be apportioned between the client and the attorneys according to this section. Any division of such an offer into damages and attorneys’ fees shall be completely disregarded by the client and the attorneys.

VI. CLIENT NOT TO SETTLE WITHOUT ATTORNEYS’ CONSENT

The client will not compromise or settle the case without the written consent of the attorneys. The client agrees not to waive the right to attorneys’ fees as part of a settlement unless the client has reached an agreement with the attorney for an alternative method of payment that would compensate the attorneys in accordance with Section III of this agreement.

VIL WIN OR LOSE RETAINER

The client agrees to pay a Five Hundred ($500.00) Dollar win or lose retainer. This amount will be credited to the attorney fees set forth in Section III in the event a recovery is made. If no recovery is made, this amount is non-refundable to the client.

VIII. LIEN

The client agrees that the attorney shall have a lien against any damages, proceeds, costs and fees recovered in the client’s action for the fees and costs due the attorney under this agreement and said lien shall be satisfied before or concurrent with the dispersal of any such proceeds and fees.

IX. CHANGE OF ATTORNEY

In the event the client chooses to terminate the contract for legal services with Fox & Fox, S.C., said firm will have a lien upon any recovery eventually obtained. Said lien will be for the fees set forth in Section III of this agreement.

In the event the client chooses to terminate the contract for legal services with Fox & Fox, S.C., the client will further make immediate payment of all outstanding costs and disbursements to the firm of Fox & Fox, S.C. and will do so within ten (10) days of the termination of the contract.

In entering into this contract Fox & Fox, S.C. has relied on the factual representations made to the firm by the client. In the event such representations are intentionally false, Fox & Fox, S.C. reserves the right to unilaterally terminate this agreement and to charge the client for services to the date of termination rendered on an hourly basis plus all costs dispersed and said amount shall be due within ten (10) days of termination.

At the time of entering into the contingent fee agreement, petitioner had paid only the $500 “win or lose” retainer to Fox & Fox. This amount was to be credited against the contingent fee that would be payable if there should be a recovery on the claim; if there should be no recovery, this amount was nonrefundable. Under section II of the agreement, petitioner expressly agreed to reimburse Fox & Fox for out-of-pocket expenses, in accordance with the firm’s normal billing policies and procedures. In contrast, under section III of the agreement (which set forth the contingent fee agreement), petitioner did not expressly agree to pay anything. Instead, section III provided how the amount of the contingent fee was to be calculated if there should be a recovery. Other sections of the agreement summarized below provided for the attorney’s lien.

The contingent fee agreement required aggregation of the elements of any settlement offer divided between damages and attorney’s fees and provided that any division of such an offer into damages and attorney’s fees would be disregarded by Fox & Fox and petitioner. The contingent fee agreement provided that petitioner could not settle his case against APV without the consent of Fox & Fox. Under the contingent fee agreement, petitioner agreed that Fox & Fox “shall have a lien” for its fees and costs against any recovery in petitioner’s action against APV. This lien by its terms was to be satisfied before or concurrently with the disbursement of the recovery. The contingent fee agreement further provided that, if petitioner should terminate his representation by Fox & Fox, the firm would have a lien for the fees set forth in section III of the agreement, and all costs and disbursements that had been expended by Fox & Fox would become due and payable by petitioner within 10 days of his termination of his representation by Fox & Fox.

APV had proposed that petitioner and the other members of the class sign separation agreements in return for some severance pay. Fox & Fox advised the class members that the form of separation agreement used by APV did not comply with the Older Workers Benefits Protection Act of 1990, Pub. L. 101-433, 104 Stat. 978. As a result, petitioner and the class members who signed the separation agreements and received severance pay were able to file administrative discrimination complaints and bring suit against APV, notwithstanding any purported release of their claims against APV in the separation agreements.

On October 16, 1991, petitioner filed an administrative complaint, using documents prepared by Fox & Fox, setting forth the basis of his age discrimination claim against APV, with dilhr. Around March 1992, DILHR sent a copy of petitioner’s complaint to the U.S. Equal Employment Opportunity Commission (eeoc). The initiation of these administrative discrimination claims was a condition precedent to bringing suit against APV under the Federal Age Discrimination in Employment Act of 1967 (ADEA), Pub. L. 90-202, sec. 2, 81 Stat. 602, current version at 29 U.S.C. secs. 621-633a (1994).

On June 16, 1992, Fox & Fox filed a complaint on behalf of petitioner and the other class members against APV in the U.S. District Court for the Western District of Wisconsin. The complaint alleged a deprivation of their rights under ADEA and sought back wages, liquidated damages, reinstatement or front pay in lieu of reinstatement, and attorney’s fees and costs and demanded a trial by jury.

EEOC had initially recommended that the members of the class settle their age discrimination suit for less than $1 million in the aggregate. The total settlement that Fox & Fox negotiated on behalf of the claimants amounted to $2,650,000, which was apportioned as follows pursuant to the contingent fee agreements:

Total recovery to class members . $1,590,000

Total fee to Fox & Fox . 1,060,000

Total settlement . 2,650,000

On February 15, 1993, the dispute between petitioner and APV was resolved by their execution of a “Settlement Agreement and Full and Final Release of Claims” (settlement agreement). Each member of the class entered into an identical settlement agreement. The entire amount received by the members of the class under their settlement agreements represented a recovery under ADEA. However, the settlement agreements required petitioner and the other members of the class to relinquish all their claims against APV, including claims for attorney’s fees and expenses but did not specifically allocate any amount of the recovery to attorney’s fees. The settlement agreement required petitioner to cause the administrative actions pending before EEOC and DILHR to be dismissed with prejudice. The settlement agreement provided that it was to be “interpreted, enforced and governed by and under the laws of the State of Wisconsin”.

Petitioner’s allocated share of the gross settlement amount of $2,650,000 was $229,501.37. Of this amount, $32,476.61 was paid as lost wages by an APV check issued directly to petitioner. APV withheld applicable Federal and State employment taxes from this portion of the settlement; the actual net amount of the check to the order of petitioner was $21,246.20.

The portion of the settlement proceeds allocated to petitioner and not designated as lost wages was $197,024.76, which the settlement agreement characterized “as and for personal injury damages which the parties intend as those types of damages excludable from income under section 104(a)(2) of the Internal Revenue Code as damages for personal injuries and the corresponding provisions of the Tax Code of the State of Wisconsin.” APV issued a check for this amount directly to the Fox & Fox trust account. Fox & Fox calculated its fee, pursuant to the contingent fee agreement, using 40 percent of the gross settlement amount of $229,501.37 allocated to petitioner. After deducting its fee of $91,800.54 and crediting petitioner with the $500 “win or lose” retainer payment, Fox & Fox issued a check for $105,724.22 from the Fox & Fox trust account to petitioner.

With the check that was received from Fox & Fox, petitioner and every other class member received a settlement statement, prepared by Fox & Fox, setting forth the recipient’s share of the total settlement, the legal fee after credit for the retainer, the net proceeds to the recipient, and the portion from which taxes would be “deducted”. The recipient signed the settlement statement, accepting and approving “the distribution of the proceeds as set forth on this statement.” The recipient also acknowledged in the settlement statement that a portion of the settlement proceeds had been characterized as personal injury damages not subject to tax, but that this characterization was not binding on taxing authorities, and agreed to pay any taxes that might become due on the proceeds.

The settlement agreement provided that APV would be held harmless for any taxes (other than on the amount allocated to lost wages) “imposed on the amounts dispersed under this agreement”.

On their 1993 income tax return, petitioners reported as income only that portion of the settlement proceeds that was allocated to wages — $32,476.61. They did not report or disclose all or any part of the $197,024.76 that was allocated to personal injury damages, nor did they claim or otherwise report a deduction for all or any part of the attorney’s fees.

The notice of deficiency that was issued to petitioners made an adjustment to their 1993 income to increase gross income in respect of the settlement of petitioner’s ADEA claims by $197,024 (from $32,477 to $229,501). The notice also allowed $91,800 in legal fees as an itemized deduction, reduced by $5,298 for the 2-percent floor on miscellaneous itemized deductions under section 67² and by $4,694 for the overall limitation on itemized deductions under section 68. The deficiency of $55,037 that was determined by respondent included a liability of $17,198 for alternative minimum tax arising from the disallowance of the miscellaneous itemized deduction of the attorney’s fees for the purpose of the alternative minimum tax under section 56(b)(l)(A)(i).

Petitioner and the other members of the class relied on the guidance and expertise of Fox & Fox in signing the separation agreements tendered to them by APV and then seeking redress against APV. Commencing with the advice to petitioner that he could sign the separation agreement with APV without giving up his age discrimination claim, Fox & Fox made all strategic and tactical decisions in the management and pursuit of the age discrimination claims of petitioner and the other class members against APV that led to the settlement agreement and the recovery from APV.

Fox & Fox was aware of the relationship between any gross settlement amount and the resulting fee that Fox & Fox would receive. In the effort to ensure that the amounts ultimately received by petitioner and the other class members would approximate the full value of their claims, Fox & Fox factored in an amount for the attorney’s fee portion of the settlement in preparing for and conducting their negotiations with APV and its attorneys.

Petitioner’s complaint filed with dilhr, his civil complaint with the District Court for the Western District of Wisconsin, and the settlement agreement were signed by Michael R. Fox or Mary E. Kennelly of Fox & Fox. Fox & Fox’s office is in Madison, Wisconsin; Mr. Fox and Ms. Kennelly are admitted to practice law in Wisconsin.

OPINION

Petitioners concede that the proceeds from the settlement are includable in gross income except for the portion of the settlement used to pay Fox & Fox under the contingent fee agreement. Specifically, petitioners argue that they exercised insufficient control over the settlement proceeds used to pay Fox & Fox and should, therefore, not be taxed on amounts to which they had no “legal” right and could not, and did not, receive. Conversely, respondent argues that (1) the amount petitioners paid or incurred as attorney’s fees must be included in petitioners’ gross income and (2) the contingent fee is deductible as a miscellaneous itemized deduction, subject to the 2-percent floor under section 67 and the overall limitation under section 68 and also nondeductible in computing the alternative minimum tax (AMT) under section 56.

This controversy is driven by the substantial difference in the amount of tax burden that may result from the parties’ approaches.³ The difference, of course, is a consequence of the plain language of sections 56, 67, and 68, so the characterization of the attorney’s fees as excludable or deductible becomes critical. There have been attempts to provide relief from the resulting tax burden by creative approaches, including attempts to modify longstanding tax principles. This Court believes that it is Congress’ imposition of the AMT and limitations on personal itemized deductions that cause the tax burden here. We perceive dangers in the ad hoc modification of established tax law principles or doctrines to counteract hardship in specific cases, and, accordingly, we have not acquiesced in such approaches. See Alexander v. IRS, 72 F.3d 938, 946 (1st Cir. 1995) (stating that the effect of the AMT on an individual taxpayer’s deduction of legal expenses “smacks of injustice” because the taxpayer is effectively robbed of any benefit from the deductibility of legal expenses as miscellaneous itemized deductions), affg. T.C. Memo. 1995-51. Despite this potential for unfairness, however, these policy issues are in the province of Congress, and we are not authorized to rewrite the statute. See, e.g., Badaracco v. Commissioner, 464 U.S. 386, 398 (1984); Warfield v. Commissioner, 84 T.C. 179, 183 (1985).

There is a split of authority among the Federal Courts of Appeals on this issue. The U.S. Court of Appeals for the Fifth Circuit reversed this Court and held that amounts awarded in Alabama litigation that were assigned and paid directly to cover attorney’s fees pursuant to a contingent fee agreement are excludable from gross income. See Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947 (1957). In Cotnam, the taxpayer entered into a contingent fee agreement to pay her attorney 40 percent of any amount recovered on a claim prosecuted on the taxpayer’s behalf. A judgment was obtained on the claim, and a check in the amount of the judgment was made jointly payable to the taxpayer and her attorney. The attorney retained his share of the proceeds and remitted the balance to the taxpayer. The Commissioner treated the total amount of the judgment as includable in the taxpayer’s gross income and allowed the attorney’s fees as an itemized deduction. This Court agreed with the Commissioner, holding that the taxpayer realized income in the full amount of the judgment, even though the attorney received 40 percent in accordance with the contingent fee agreement.

The U.S. Court of Appeals for the Fifth Circuit’s reversal was based on two legal grounds. An opinion by Judge Wisdom on behalf of the panel reasoned that, under the Alabama attorney lien statute, an attorney has an equitable assignment or lien enabling the attorney to hold an equity interest in the cause of action to the extent of the contracted-for fee. See id. at 125. Under the Alabama statute, attorneys had the same right to enforce their lien as clients have or had for the amount due the clients. See id.

The other judges in Cotnam, Rives and Brown, in a separate opinion, stated that the claim involved was far from being perfected and that it was the attorney’s efforts that perfected or converted the claim into a judgment. Judge Wisdom, in the second of his opinions, dissented, reasoning that the taxpayer had a right to the-already-earned income and that it could not be assigned to the attorneys without tax consequence to the assignor. The Cotnam holding with respect to the Alabama attorney lien statutes has been distinguished by this Court from cases interpreting the statutes of numerous other States. Significantly, this Court has, for nearly 40 years, not followed Cotnam with respect to the analysis in the opinion of Judges Rives and Brown that the attorney’s fees came within an exception to the assignment of income doctrine. See, e.g., Estate of Gadlow v. Commissioner, 50 T.C. 975, 979-980 (1968) (Pennsylvania law); O’Brien v. Commissioner, 38 T.C. 707, 712 (1962), affd. per curiam 319 F.2d 532 (3d Cir. 1963); Petersen v. Commissioner, 38 T.C. 137, 151-152 (1962) (Nebraska law and South Dakota law); Srivastava v. Commissioner, T.C. Memo. 1998-362, on appeal (5th Cir., June 14, 1998) (Texas law); Coady v. Commissioner, T.C. Memo. 1998-291, on appeal (9th Cir., Nov. 3, 1998) (Alaska law).

Addressing the assignment of income question in similar circumstances, the U.S. Court of Appeals for the Federal Circuit reached a result opposite from that reached in Cotnam. See Baylin v. United States, 43 F.3d 1451, 1454-1455 (Fed. Cir. 1995). In Baylin, a tax matters partner entered into a contingent fee agreement with the partnership’s attorney in a condemnation proceeding. When the litigants entered into a settlement, the attorney received his one-third contingency fee directly from the court in accordance with the fee agreement. On its tax return, the partnership reduced the amount realized from the condemnation by the amount of attorney’s fees attributable to recovery of principal and deducted from ordinary income the attorney’s fees attributed to the interest income portion of the settlement. The Government challenged this classification of the attorney’s fees, determining that the attorney’s fees constituted a capital expenditure and could, therefore, not reduce ordinary income.

The Court of Federal Claims agreed with the Government. On appeal, the taxpayer argued that the portion of the recovery used to pay attorney’s fees was never a part of the partnership’s gross income and should be excluded from gross income. The Federal Circuit, rejecting the taxpayer’s argument, held that even though the partnership did not take possession of the funds that were paid to the attorney, it “received the benefit of those funds in that the funds served to discharge the obligation of the partnership owing to the attorney as a result of the attorney’s efforts to increase the settlement amount.” Id. at 1454. The Court of Appeals for the Federal Circuit sought to prohibit taxpayers in contingency fee cases from avoiding Federal income tax with “skillfully devised” fee agreements. See id.

The U.S. Court of Appeals for the Ninth Circuit reached the same result as the court in Baylin regarding the includability of attorney’s fees in a taxpayer’s gross income. In Brewer v. Commissioner, 172 F.3d 875 (9th Cir. 1999), affg. without published opinion T.C. Memo. 1997-542, the Court of Appeals affirmed the Tax Court decision holding that the portion of a title VII settlement that was paid directly to the taxpayer’s attorney was not excludable from the taxpayer’s gross income.

In a recent holding, the U.S. Court of Appeals for the Sixth Circuit reached a result based on similar reasoning to that used in Cotnam. See Estate of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000). In Estate of Clarks, after a jury awarded the taxpayer personal injury damages and interest, the judgment debtor paid the taxpayer’s lawyer the amount called for in the contingent fee agreement. Because the portion of the attorney’s fees that was attributable to the recovery of taxable interest was paid directly to the attorney, the taxpayer excluded that amount from gross income on the estate’s Federal income' tax return. The Commissioner determined that the portion of the attorney’s fees attributable to interest was deductible as a miscellaneous itemized deduction and was not excludable from gross income. The taxpayer paid the deficiency and sued for a refund in Federal District Court.

The District Court granted summary judgment in favor of the Government. The U.S. Court of Appeals for the Sixth Circuit reversed, employing reasoning similar to that used in Cotnam. The Court of Appeals held that, under Michigan law, the taxpayer’s contingent fee agreement with the lawyer operated as a lien on the portion of the judgment to be recovered and transferred ownership of that portion of the judgment to the attorney. The court seemed to place greater emphasis on the fact that the taxpayer’s claim was speculative and dependent upon the services of counsel when it was assigned. In that respect, the court held that the assignment was no different from a joint venture between the taxpayer and the attorney. The court explained that this case was distinguishable from other assignment of income cases in that there was “no vested interest, only a hope to receive money from the lawyer’s efforts and the client’s right, a right yet to be determined by judge and jury.” Id. at 857. The court stated:

Here the client as assignor has transferred some of the trees in his orchard, not merely the fruit from the trees. The lawyer has become a tenant in common of the orchard owner and must cultivate and care for and harvest the fruit of the entire tract. Here the lawyer’s income is the result of his own personal skill and judgment, not the skill or largess of a family member who wants to split his income to avoid taxation. The income should be charged to the one who earned it and received it, not as under the government’s theory of the case, to one who neither received it nor earned it. The situation is no different from the transfer of a one-third interest in real estate that is thereafter leased to a tenant. [Id. at 858.⁴]

This Court has, for an extended period of time, held the view that taxable recoveries in lawsuits are gross income in their entirety to the party-client and that associated legal fees — contingent or otherwise — are to be treated as deductions.⁵ See Bagley v. Commissioner, 105 T.C. 396, 418-419 (1995), affd. 121 F.3d 393, 395-396 (8th Cir. 1997); O’Brien v. Commissioner, 38 T.C. 707, 712 (1962), affd. per curiam 319 F.2d 532 (3d Cir. 1963); Benci-Woodward v. Commissioner, T.C. Memo. 1998-395, on appeal (9th Cir., Feb. 2, 1999). In O’Brien, we held that “even if the taxpayer had made an irrevocable assignment of a portion of his future recovery to his attorney to such an extent that he never thereafter became entitled thereto even for a split second, it would still be gross income to him under” assignment of income principles. O’Brien v. Commissioner, supra at 712. “Although there may be considerable equity to the taxpayer’s position, that is not the way the statute is written.” Id. at 710. In reaching this conclusion, we rejected the distinction made in Cotnam v. Commissioner, supra, with respect to the Alabama attorney’s lien statute, stating that it is “doubtful that the Internal Revenue Code was intended to turn upon such refinements.” O’Brien v. Commissioner, supra at 712. Numerous decisions of this Court have reached the same result as O’Brien by distinguishing other States’ attorney’s lien statutes from the Alabama statute considered in Cotnam. See Estate of Gadlow v. Commissioner, 50 T.C. 975, 979-980 (1968) (Pennsylvania law); Petersen v. Commissioner, 38 T.C. 137, 151-152 (1962) (Nebraska law and South Dakota law); Sinyard v. Commissioner, T.C. Memo. 1998-364, on appeal (9th Cir., Oct. 15, 1999) (Arizona law); Srivastava v. Commissioner, T.C. Memo. 1998-362 (Texas law); Coady v. Commissioner, T.C. Memo. 1998-291 (Alaska law).

After further reflection on Cotnam and now Estate of Clarks v. United States, supra, we continue to adhere to our holding in O’Brien that contingent fee agreements, such as the one we consider here, come within the ambit of the assignment of income doctrine and do not serve, for purposes of Federal taxation, to exclude the fee from the assignor’s gross income. We also decline to decide this case based on the possible effect of various States’ attorney’s lien statutes.⁶

Section 61(a) provides that “gross income means all income from whatever source derived,” and typically, all gains are taxed unless specifically excluded. See James v. United States, 366 U.S. 213, 219 (1961). We can identify no specific exclusion from gross income for the payment made to Fox & Fox. While it is true that petitioner did not physically receive the portion of the settlement proceeds used to pay the attorney’s fees, he did receive the full benefit of those funds in the form of payment for the services required to obtain the settlement. At the time that petitioner entered into the contingent fee agreement, he had already been discriminated against in the form of his wrongful termination from employment. In other words, petitioner was owed damages, and the attorney was willing to enter into a contingent fee agreement to recover the damages owed to petitioner. Therefore, petitioner must recognize as income the amount of the judgment.

In coming to this conclusion, we reject the significance placed by the U.S. Court of Appeals for the Sixth Circuit on the speculative nature of the claim and/or that the claim, was dependent upon the assistance of counsel. Despite characterizing petitioner’s right, to recovery as speculative, his cause of action had value in the very beginning; otherwise, it is unlikely that Fox & Fox would have agreed to represent petitioner on a contingent basis. We find no meaningful distinction in the fact that the assistance of counsel was necessary to pursue the claim. Attorney’s fees, contingent or otherwise, are merely a cost of litigation in pursuing a client’s personal rights. Attorneys represent the interests of clients in a fiduciary capacity. It is difficult, in theory or fact, to convert that relationship into a joint venture or partnership. The entire ADEA award was “earned” by and owed to petitioner, and his attorney merely provided a service and assisted in realizing the value already inherent in the cause of action.

An anticipatory assignment of the proceeds of a cause of action does not allow a taxpayer to avoid the inclusion of income for the amount assigned.⁷ A taxpayer who enters into an agreement for the rendering of services that assists in the recovery from a third party must include the amount recovered (compensation) in gross income, irrespective of whether it is received by the taxpayer. See Hober v. Commissioner, T.C. Memo. 1984 — 491; Loeffler v. Commissioner, T.C. Memo. 1983-503. This Court, relying on Lucas v. Earl, 281 U.S. Ill (1930), has consistently held that a taxpayer cannot avoid taxation on his income by an anticipatory assignment of that income to another. See id. Thus, any anticipatory assignment by the taxpayer of the proceeds of the lawsuit must be included in the taxpayer’s gross income.

We reject petitioner’s contention that he had insufficient control over his cause of action to be taxable on a recovery of a portion of the settlement proceeds that was diverted to or paid to Fox & Fox under the contingent fee agreement. There is no evidence - supporting petitioner’s contention that he had no control over his claim. In Wisconsin, a lawyer cannot acquire a proprietary interest that would enable the attorney to continue to press a cause of action despite the client’s wish to settle. Indeed, the Supreme Court of Wisconsin has stated that “The claim belongs to the client and not the attorney, the client has the right to compromise or even abandon his claim if he sees fit to do so.” Goldman v. Home Mut. Ins. Co., 22 Wis. 2d 334, 341, 126 N.W.2d 1 (1964).

Likewise, petitioner has not waived his right to settle his claim at any time, and it would be an ethical violation for his attorney to press forward with such a case against the will of the client. Wisconsin Supreme Court rule 20:1.2(a) provides:

A lawyer shall abide by a client’s decisions concerning the objectives of representation, subject to paragraphs (c), (d) and (e), and shall consult with the client as to the means by which they are to be pursued. A lawyer shall inform a client of all offers of settlement and abide by a client’s decision whether to accept an offer of settlement of a matter. * * *

Although petitioner may have entrusted Fox & Fox with the details of his litigation, ultimate control was not relinquished. If petitioner wanted to proceed without Fox & Fox, he could have obtained new representation.

The assignment of income doctrine was originated by the Supreme Court and has evolved over the past 70 years. See Helvering v. Eubank, 311 U.S. 122 (1940); Helvering v. Horst, 311 U.S. 112 (1940); Lucas v. Earl, supra. Although legislation may result in anomalous or inequitable results with respect to particular taxpayers, we are not in a position to address those policy questions. So, for example, if the AMT computation effectively renders de minimis a taxpayer’s recovery due to the nondeductibility of the attorney’s fees, we should not be tempted to modify established assignment of income principles to remedy the situation. That could result in a certain class of taxpayers’ (those who receive reportable income from judgments) being treated differently from all other taxpayers who are subject to the AMT. These are matters within Congress’ authority to decide. Congress, not the courts, is the final arbiter of how the tax burden is to be borne by taxpayers.

Even if we were willing to follow the Cotnam and/or Estate of Clarks “attorney’s lien” rationale, our analysis of the Wisconsin statutes and case law would not result in excluding the attorney’s fees from petitioners’ gross income here. In Cotnam, the Alabama statute provided that “attorneys at law shall have the same right and power over said suits, judgments and decrees, to enforce their liens, as their clients had or may have for the amount due thereon to them.” Cotnam v. Commissioner, 263 F.2d 119, 125 n.5 (5th Cir. 1959) (quoting Ala. Code sec. 64 (1940)). The relevant Wisconsin statute does not recognize the same right and power in favor of attorneys that was identified in the Alabama attorney’s lien statute. The Wisconsin statute provides:

Any person having or claiming a right of action, sounding in tort or for unliquidated damages on contract, may contract with any attorney to prosecute the action and give the attorney a lien upon the cause of action and upon the proceeds or damages derived in any action brought for the enforcement of the cause of action, as security for fees in the conduct of the litigation; when such agreement is made and notice thereof given to the opposite party or his or her attorney, no settlement or adjustment of the action may be valid as against the lien so created, provided the agreement for fees is fair and reasonable. This section shall not be construed as changing the law in respect to champertous contracts. [Wis. Stat. Ann. sec. 757.36 (West 1981).]

This statute provides for an attorney’s lien upon the cause of action or upon the proceeds or damages from such cause of action to secure compensation, but it does not give attorneys the same rights as their clients over the proceeds of suits, judgments, and decrees. Accordingly, the Wisconsin statute contains obvious differences and is distinguishable from the Alabama statute.

A 100-year-old Wisconsin case contains an indication that at one time, an attorney in Wisconsin may have had the type of rights’ described in Cotnam. See Smelker v. Chicago & N.W. Ry., 106 Wis. 135, 81 N.W. 994 (1900). In Smelker, the Wisconsin Supreme Court held that an attorney could press the underlying cause of action to enforce the attorney’s lien even after the client had settled. While the Wisconsin court expressed doubt about the propriety of such a policy, the statutory lien provision in effect at the time appeared to the court to require such a result. At the time of Smelker, the statute provided for attorney’s liens only on the “cause of action”. As such, the Wisconsin Supreme Court reasoned that the only way an attorney’s lien could withstand settlement was if the cause of action could continue at the behest of the attorney. This is no longer the situation. The Wisconsin attorney’s lien statute was amended after the decision in Smelker. The statute in effect for purposes of this case provides for an attorney’s lien on the cause of action as well as the proceeds or damages from the cause of action and does not give the attorney the right to continue an action after the client settles. See Wis. Stat. Ann. sec. 757.36 (1981). In light of the statement-in Goldman v. Home Mut. Ins. Co., supra, that a claim belongs to the client and not the attorney, the fact that Smelker has only been cited by a Wisconsin court once (in 1902 and even then not for the proposition that attorneys have the same rights and power over suits as their clients), and the fact that Wisconsin’s attorney’s lien statute was revised, Smelker has not retained its vitality, and we do not read it as standing for the proposition that attorneys in Wisconsin have the same rights as their clients over suits.

We conclude that petitioner’s award, undiminished by the amount that he paid to Fox & Fox, is includable in his 1993 gross income. The amount paid to Fox & Fox is deductible subject to certain statutory limitations as determined by respondent. We have also considered petitioners’ remaining arguments and, to the extent not mentioned herein, find them to be without merit. To reflect the foregoing,

Decision will be entered under Rule 155.

Reviewed by the Court.

Cohen, Whalen, Chiechi, Laro, Gale, Thornton, and Marvel, JJ., agree with this majority opinion. Halpern, Foley, and Vasquez, JJ., did not participate in consideration of this opinion.

This case was reassigned to Judge Robert P. Ruwe by order of the Chief Judge.

1

The portions of the agreement not quoted are secs. “I. INTRODUCTION”, “IV. THE ATTORNEYS’ FEES WHERE THERE IS A SEPARATE PAYMENT OF ATTORNEYS’ FEES”, and ‘V. EXPLANATION OF FEE CONCEPTS”. Sec. V sets forth a justification for the provisions of the agreement that is couched in terms of obviating the potential for conflicts of interest between the attorneys and the client by creating an identity of economic interests of attorneys and client in the prosecution of the claim.

2

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

3

Under respondent’s position in this case, the settlement proceeds are included in petitioners’ gross income in full, but the itemized deduction is subject to limitations and is not available in computing the alternative minimum tax (AMT). Under these circumstances, it is possible that the attorney’s fees and tax burden could consume a substantial portion (possibly all) of the damages received by a taxpayer. It is noted, however, that if the recovery or income was received in a trade or business setting, the attorney’s fees may be fully deductible in arriving at adjusted gross income, thereby obviating the perceived unfairness that may be occasioned in the circumstances we consider in this case. Commentators and courts have long observed this potential for unfairness in the operation of the AMT in this and other areas of adjustments and tax preference items. See, e.g., “State Bar of California Tax Section, Partial Deduction of Attorneys’ Fees Proposed for Computing AMT”, 1999 TNT 125-45 (June 30, 1999); Wood, “The Plight of the Plaintiff: The Tax Treatment of Legal Fees”, 98 TNT 220-101 (Nov. 16, 1998).

4

The Court of Appeals’ analogy is, to some extent, inapposite because the transfer of trees in and of itself could be consideration in kind and result in gains to the t^payer. More significantly, if the trees are analogous to the taxpayer’s chose in action or compensatory rights, then the transfer represents a classic anticipatory assignment of income.

5

This view is based on the well-established assignment of income doctrine that was originated by the Supreme Court in Lucas v. Earl, 281 U.S. 111 (1930). Lucas v. Earl, supra, has been relied on by this Court for assignments of income involving both related and unrelated taxpayers.

6

With the exception of situations where, under our holding in Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), we feel compelled to follow the holding of a Court of Appeals, we have consistently held that attorney’s fees are not subtracted from taxpayers’ gross income to arrive at adjusted gross income. In Davis v. Commissioner, T.C. Memo. 1998-248, affd. per curiam 210 F.3d 1346 (11th Cir. 2000), we followed Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947 (1957), because the appeal would lie to the Court of Appeals for the 11th Circuit, which follows precedents of the Court of Appeals for the Fifth Circuit for cases decided before Oct. 1, 1982. In a per curiam opinion, the Court of Appeals for the 11th Circuit affirmed our decision based on the binding Cotnam precedent and declined to consider the Commissioner’s argument that Cotnam was wrongly decided, noting that Cotnam can be overruled only by the court sitting en banc. See Davis v. Commissioner, 210 F.3d 1346 (11th Cir. 2000); see also Foster v. United States, _ F. Supp. 2d _ (N.D. Ala., Mar. 13, 2000), on appeal (11th Cir., Apr. 10, 2000), where the District Court generally followed Cotnam as binding precedent but denied litigation costs, explaining:

The court does not find, however, that under § 7430(c)(4)(A)(i) the position of the United States (i.e., with respect to Cotnam) was not substantially justified. Yes, the court does conclude that Cotnam does control most of the issues respecting attorney’s fees and, until the Com-t of Appeals or Supreme Court rules otherwise, is binding on this court.

But there are serious and legitimate questions as to whether the holding in Cotnam should continue to be followed in this or other circuits. Strong arguments can be made — and presumably will be made by the government in seeking en banc consideration of this issue in the Davis case or on appeal of this case — that Cotnam is not consonant with Supreme Court decisions like Horst and, indeed, is based on a misinterpretation of Alabama law involving contingent fee contracts and attorneys’ lien rights. In particular, Cotnam did not give attention to the continuing control that, even after entering into a contingent fee contract, the tort plaintiff has with respect to settlement of the entirety of the claim or to the continuing power of the client to discharge an attorney and effectively cancel the “assignment” of a share in later recoveries. The 1998 appeal by the government of Davis, filed before this case was brought, indicated that its attack upon Cotnam represents a fundamental disagreement with that decision, and not some personal animus against Foster in the present case. The rejection in January 2000 by a second appellate court (the Sixth Circuit in the Estate of Clarks case) does not support an assertion that the government’s [sic] in this case was without substantial foundation. This court determines that Foster is not entitled to litigation costs under § 7430.

7

The assignment by a taxpayer of a right to collect a doubtful and uncertain pending claim against the United States in exchange for cash and other consideration did not constitute an anticipatory assignment of income in Jones v. Commissioner, 306 F.2d 292 (5th Cir. 1962), revg. T.C. Memo. 1960-115, and thus the taxpayer was not taxable on the amount ultimately recovered on the claim. In Reffett v. Commissioner, 39 T.C. 869 (1963), however, we distinguished Jones in a factual setting similar to this case and held that proceeds from a taxpayer’s lawsuit that were paid to witnesses for their services during the lawsuit were includable in the taxpayer’s gross income. In addition, the U.S. Court of Appeals for the Ninth Circuit has factually distinguished Jones and held that an attorney’s transfer of part of a contingent legal fee earned by him was an assignment of income within the meaning of Lucas v. Earl, 281 U.S. 111 (1930). See Koshansky v. Commissioner, 92 F.3d 957, 958 (9th Cir. 1996), affg. in part, revg. in part T.C. Memo. 1994-160.