Commissioner v. Banks

543 U.S. 426 (2005)

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Nature of the Case

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Facts

D was fired from his job as an educational consultant with the California Department of Education. He retained an attorney on a contingent-fee basis and filed a civil suit. After trial commenced in 1990, the parties settled for $464,000. D paid $150,000 of this amount to his attorney pursuant to the fee agreement. D did not include any of the $464,000 in settlement proceeds as gross income in his 1990 federal income tax return. In 1997 the Commissioner of Internal Revenue issued D a notice of deficiency for the 1990 tax year. The Tax Court upheld the Commissioner's determination, finding that all the settlement proceeds, including the $150,000 D had paid to his attorney, must be included in D's gross income. The Court of Appeals for the Sixth Circuit reversed in part. The court held the contingent-fee agreement was not an anticipatory assignment of D's income because the litigation recovery was not already earned, vested, or even relatively certain to be paid when the contingent-fee contract was made. The attorney is not the mere beneficiary of the client's largess but rather earns his fee through skill and diligence. D1 retained an attorney on a contingent-fee basis and brought suit in Oregon state court against the Bank of California and its successor in ownership, the Mitsubishi Bank for breach of an employment contract. The jury awarded D1compensatory and punitive damages. After resolution of all appeals and post-trial motions, the parties settled. The defendants paid $4,864,547 to D1; and, following the formula set forth in the contingent-fee contract, D1 paid an additional $3,864,012 directly to D1's attorney. D1 did not include the amount paid to his attorney in gross income on his federal income tax return, and the Commissioner issued a notice of deficiency. The Tax Court upheld the Commissioner's determination, but the Court of Appeals for the Ninth Circuit reversed. Where state law confers on the attorney no special property rights in his fee, the court said, the whole amount of the judgment or settlement ordinarily is included in the plaintiff's gross income. Oregon state law, however, like the law of some other States, grants attorneys a superior lien in the contingent-fee portion of any recovery. As a result, the court held, contingent-fee agreements under Oregon law operate not as an anticipatory assignment of the client's income but as a partial transfer to the attorney of some of the client's property in the lawsuit.