Sinyard v. Commissioner

268 F.2d 756 (9th Cir. 2001)

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Nature of the Case

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Facts

Sinyard (D) was a manager for IDS. At the age of 49, he was forced to resign. D joined two class actions against IDS alleging age discrimination. As part of his agreement with counsel, they were to be paid 1/3^rd of the amount he would obtain by either settlement or jury award. In 1990, the EEOC intervened, and the suits were settled. IDS agreed to pay $5 million. After costs of $1.7 million were deducted the remaining amounts were allocated 1/3^rd to tort claims, 1/3^rd to lost wages and 1/3^rd to attorney’s fees pursuant to 29 U.S.C. 626(b) and 216(b). IDS agreed to pay the attorney’s fees plus the amounts allocated to legal costs and disbursements directly to the attorneys. The settlement was approved in 1992. The IRS assessed a deficiency in D’s 1992 tax return. The IRS contended that the payment of the attorney’s fees had satisfied an obligation of D and thus it was income. D’s share of the settlement was $547,146. In addition, legal fees and costs of $63,152 were allocated to the nontaxed personal injury damages and excluded from income. The IRS contends that $252,608 in attorney’s fees should be treated as income. The Commissioner held this amount allowable as a miscellaneous itemized deduction that was reduced by 2% of Adjusted Gross Income. This left a deduction of $240,984. The full amount of this deduction could not be taken because D’s income was subject to AMT. The Tax Court upheld the deficiency under 56(b)(1)(A)(i) and Chapter 27C. D appealed.