Hukkanen-Campbell v. Commissioner of Internal Revenue Petition for a Writ of Certiorari

    !
I

No.

3n tfje Supreme Court of tfje ®mteb States

Nancy J. Hukkanen-Campbell,

v.
Petitioner,

Commissioner of Internal Revenue,

Respondent

Petition for a Writ of Certiorari to the 
United States Court of Appeals for the Tenth Circuit

PETITION FOR A WRIT OF CERTIORARI

Roger J. Jones 
Counsel o f  Record 

Russell R. Young 
Mayer, Brown, Rowe & Maw 
190 South LaSalle Street 
Chicago, Illinois 60603 
(312) 782-0600

Counsel fo r  Petitioner



I

QUESTION PRESENTED

Whether the Tenth Circuit erred in holding, in conflict with 
the Fifth, Sixth, and Eleventh Circuits, that contingent 
attorneys’ fees paid by a defendant directly to the attorneys of 
a prevailing plaintiff under Title VII of the Civil Rights Act of 
1964 constitute taxable income to the plaintiff, thereby 
triggering alternative minimum tax liability.



QUESTION PRESENTED ..................................................... i

OPINIONS BELOW ............................................................  1

JURISDICTION....................................................................  1

STATUTES INVOLVED IN THIS CASE .......................  1

STATEMENT OF THE CASE ........................................... 2

A. Factual Background ............................................. 2

B. Tax Treatment and Statutory Background ........  4

C. Proceedings B e lo w ...............................................  6

REASONS FOR GRANTING THE PETITION...............  7

I. THIS COURT SHOULD RESOLVE THE 
CONFLICT AMONG THE CIRCUITS OVER THE 
TAX STATUS OF CONTINGENT ATTORNEY’S 
FEES AS INCOME TO THE ATTORNEY’S 
CLIENT...........................................................................  8

A. The Tenth Circuit’s Decision in this Case 
Directly Conflicts With Recent Decisions of the 
Fifth, Sixth, and Eleventh Circuits.......................  9

1. Circuits reaching the opposite conclusion 
to that of the Tenth Circuit .......................... 9

ii

TABLE OF CONTENTS
Page

in

2. Circuits, besides the Tenth Circuit, 
reaching the opposite conclusion of that of 
the Fifth, Sixth, and Eleventh Circuits . . .  12

3. The split among the circuits is not 
attributable to differences in State law. . . .  13

B. Resolution of the Conflict among the Circuits Is 
Necessary to Promote Uniform Application of 
the Federal Income Tax Laws on an Important 
and Recurring Issue..............................................  15

II. THIS COURT SHOULD REVERSE THE TENTH 
CIRCUIT’S ERRONEOUS APPLICATION OF 
THE TESTS FOR INCOME RECOGNITION 
ESTABLISHED BY THIS COURT’S DECISIONS. . . 18

A. Under the Tests for Income Recognition 
Established by this Court’s Opinions, the 
Attorneys’ Fees Paid to Ms. Hukkanen’s 
Attorneys Do Not Constitute Income to Her. . . 18

1. Income cannot be attributed to a taxpayer 
who does not have control over the source
of the income................................................. 19

2. Ms. Hukkanen did not have the control of
the attorneys’ fees portion of her lawsuit 
required to charge her with receipt of 
income...........................................................  20

TABLE OF CONTENTS—Continued
Page



IV

3. The assignment of income doctrine is 
inapplicable to Ms. Hukkanen’s retention 
of attorneys on a contingent fee basis......... 22

B. The Tenth Circuit’s Decision Leads to Absurd 
Results at Odds with the Legislative Purposes of 
the Alternative Minimum Tax and Title VII. . . 25

TABLE OF CONTENTS— Continued
Page

CONCLUSION 29

v

Cases. Page

Alexander v. IRS, 72 F.3d 938 (1st Cir. 1995).................... 23

Barlow-Davis v. Commissioner, 210 F.3d 1346
(11th Cir. 2000) ............................................. 10, 11, 12

Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995) . . 13

Benci-Woodward v. Commissioner, 219 F.3d 941
(9th Cir. 2000) ..........................................................  15

Christiansburg Garment Co. v. EEOC, 434 U.S 412 
(1 9 7 8 )........................................................................... 28

Coady v. Commissioner, 213 F.3d 1187 (9th Cir. 
2000) .............................................................. 12, 13, 15

Cold Metal Process Co. v. Commissioner, 247 F.2d 864 
(6th Cir. 1957) .....................................................  24,25

Commissioner v. Glenshaw Glass Co., 348 U.S. 426
(1 9 5 5 )........................................................................... 20

Commissioner v. Indianapolis Power & Light Co.,
493 U.S. 203 (1990)............................................. 20,22

Commissioner v. Sunnen, 333 U.S. 591 (1948) . .  19, 23, 24

Commissioner v. Tufts, 461 U.S. 300 (1983)....................  19

Corliss v. Bowers, 281 U.S. 376 (1930) ................... 19,21

TABLE OF AUTHORITIES



VI

Cotnam v. Commissioner, 263 F.2d 119
(5th Cir. 1959) ........................................... 9, 10, 12, 13

Estate o f Clarks v. United States, 202 F.3d 854
(6th Cir. 2000) ................................................. 11,12, 13

Foster v. United States, 249 F.3d 1275 (11th
Cir. 2 0 0 1 ) ...........................................................  10, 12

Golsen v. Commissioner, 54 T.C. 742 (1970), ajf'd,
445 F.2d 985 (10th Cir. 1971) ....................................  8

Griffin v. Commissioner, T.C. Memo. 2001-5 (2001) . . .  11

Harrison v. Schajfner, 312 U.S. 579 (1 9 4 1 )...................  22

Helvering v. Eubank, 311 U.S. 122 (1 9 4 0 )...............  22, 23

Helvering v. Horst, 311 U.S. 112 (1940)...................  22, 23

International Bhd. o f Teamsters v. United States,
431 U.S. 324(1977)...................................................  28

Jones v. Commissioner, 306 F.2d 292 (5th Cir. 1962) . 22, 25

Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd,
259 F.3d 881 (7th Cir. 2001) ..............................  16,27

Kenseth v. Commissioner, 259 F.3d 881 (7th Cir. 
2001) ..................................................................... passim

TABLE OF AUTHORITIES—Continued
Page

Lucas v. Earl, 281 U.S. 111 (1930) 22, 23

vn

Newman v. Piggie Park Enters., 390 U.S. 400 (1968) . . 28

TABLE OF AUTHORITIES—Continued
Page

Sinyard v. Commissioner, 268 F.3d 756
(9th Cir. 2001) .....................................................  14,15

Srivastava v. Commissioner, 220 F.3d 353
(5th Cir. 2000) ............................................... 10,12,14

Turnbow v. Commissioner, 368 U.S. 337 (1961) ...........  16

United States v. Brown, 333 U.S. 18 (1 9 4 8 )...................  25

Young v. Commissioner, 240 F.3d 369
(4th Cir. 2001) ............................................  12, 13, 14

Statutes:

26 U.S.C. §§ 55-59 .......................................................... 2 ,5

26 U.S.C. § 55(b)(1)(A).......................................................  5

26 U.S.C. § 55(b)(2) ............................................................  5

26 U.S.C. § 6 1 (a ) .......................................................  5, 6, 25

26 U.S.C. § 6 3 (a ) ..................................................................  5

26 U.S.C. § 6 7 (b )..................................................................  5

26 U.S.C. §6123(a) 6



Vlll

26 U.S.C. § 6214(a)............................................................. 6

26 U.S.C. § 7482(a)(1)........................................................  6

26 U.S.C. § 7482(b)(1)(A).................................................. 8

26 U.S.C. § 7742 ................................................................. 6

42 U.S.C. § 2000e-5(k) ............................................. 2, 3, 28

Mo. Ann. Stat. §484.130 (West 1987) ............................ 21

Miscellaneous:

Doug Clark, Hero Fought O ff One Robber, Now Facing 
IRS, Spokane Spokesman-Review, Apr. 29,2001, 
at B1 .............................................................................  17

Stephen D. Feldman, Exclusion o f Contingent Attorneys '
Fees from Gross Income, 68 U. Cm. L. Rev. 1309 
(2001) ........................................................................... 17

Tom Herman, Tax Report, Wall S r. J., Aug. 2, 2000, at 
A 1 .................................................................................  17

David Cay Johnston, A Stealth Tax Is Creeping Up on 
Growing Numbers o f Americans, N.Y. Times, Feb.
17, 2002, Sec. 3, at 17

TABLE OF AUTHORITIES—Continued
Page

17

IX

Benjamin C. Rasmussen, Taxation o f an Attorney’s

TABLE OF AUTHORITIES—Continued
Page

Contingency Fee o f a Punitive Damages Recovery:
The Srivastava Approach, 15 BYU J. PUB. L. 301 
( 2001) ............................................................................................................... 17

S. Rep. No. 97-494(1982).................................................  28

S. Rep. No. 99-313 (1986).................................................  28

Laura Sager & Stephen Cohen, “How the Income Tax 
Undermines Civil Rights Law," 73 S. Cal. L. Rev.
1075 (2000) ................................................................  29

Lauren E. Sheridan, “Trees in the Orchard or Fruit from  
the Trees?: The Case for Excluding Attorneys ’ 
Contingent Fees from the Client s Gross Income," 36 
Ga.L. Rev. 283 (2001) ............................................. 17



PETITION FOR A WRIT OF CERTIORARI

Nancy J. Hukkanen-Campbell respectfully petitions for a 
writ of certiorari to review the judgment of the United States 
Court of Appeals for the Tenth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, la-5a) is 
reported at 274 F.3d 1312. The opinion of the United States 
Tax Court (App., infra, 6a-18a) is a memorandum decision, 
T C. Memo. 2000-180 (June 12,2000), not officially reported! 
but available at 79 T.C.M. (CCH) 2122 (2000).

JURISDICTION

The judgment of the court of appeals was entered on 
December 19, 2001. App., infra, la. The jurisdiction of this 
Court is invoked under 28 U.S.C. § 1254(1).

STATUTES INVOLVED IN THIS CASE

The principal federal statute involved in this case is section 
61(a) of the Internal Revenue Code of 1986, as amended and 
in effect in 1993 (the “Code”):

(a) G eneral De f in it io n .— Except as otherwise 
provided in this subtitle, gross income means all income 
from whatever source derived, including (but not limited 
to) the following items:

(1) Compensation for services, including fees,
commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;



2

(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment
contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross
income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.

26 U.S.C. § 61(a). This case also tangentially involves the 
alternative minimum tax provisions of the Code, 26 U.S.C. 
§§ 55-59, and the fee-shifting provisions cf Title VII of the 
Civil Rights Act of 1964, 42 U.S.C. § 2000e-5(k).

STATEMENT OF THE CASE

This case presents a recurring question of significant 
importance in the tax law. It involves the 1993 Federal income 
tax liability of Petitioner Nancy J. Hukkanen-Campbell (“Ms. 
Hukkanen”) on amounts paid by her former employer in 
connection with Ms. Hukkanen’s successful sexual harassment 
lawsuit brought under Title VII of the Civil Rights Act of 
1964. The outcome of this case affects a broad class of 
taxpayers that includes a large number of individual plaintiff- 
taxpayers who prevail in lawsuits that give rise to substantial 
taxable recoveries and attorney’s fees.

A. Factual Background

From 1981 to 1984, Ms. Hukkanen was subjected to sexual 
harassment on a regular basis by her former employer. Ex. 5-J

3

at 47.- After filing a complaint with the Equal Employment 
Opportunity Commission (“EEOC”), Ms. Hukkanen retained 
attorney Fred Petzold and three other attorneys through a 
contingent fee agreement, under which the attorneys were 
entitled to receive the greater of (a) 45 percent of the recovery, 
(b) $125 per hour, or (c) any court awarded fee, plus costs. 
The contingent fee agreement also granted the attorneys a lien 
on the claim for the amounts payable to them under the 
agreement. App., infra, 8a; Ex. 8-J at 285.

Ms. Hukkanen obtained a “right-to-sue” letter from the 
EEOC in February 1990, soon after retaining her attorneys and 
being informed that she could request such a letter. Ex. 8-J at 
286. Mr. Petzold filed a complaint on Ms. Hukkanen’s behalf 
with the District Court for the Western District of Missouri, 
alleging that she was constructively discharged from her 
employment in violation of Title VII of the Civil Rights Act of 
1964, Pub. L. No. 88-352, § 701 et seq. (“Title VII”). Ex. 4-J.

After a bench trial on February 13, 1992 and a hearing on 
March 31, 1992, the district court found that the sexual 
harassment had resulted in Ms. Hukkanen’s constructive 
termination in violation of Title VII. Ex. 5-J at 45-52. On 
April 3, 1992, the district court entered its Final Judgment, 
awarding Ms. Hukkanen: (1) $55,492 in back pay; (2) 
$82,534.81 in pension benefits; and (3) $44,418.06 in front 
pay. App., infra, 7a; Ex. 6-J at 1-2.

The district court also awarded “a reasonable attorney’s 
fee” in the amount of $85,227.50 pursuant to the fee-shifting 
provision of Title VII, 42 U.S.C. § 2000e-5(k). This award 
included a multiplier of three times the lodestar amount “to

I References to “Ex.” are to the Tax Court joint exhibits, which were 
part o f the record on appeal to the Tenth Circuit.



4

compensate plaintiff s attorney for the risk incurred by him in 
agreeing to represent [Ms. Hukkanen] and pursuing her claim 
with only a contingent fee arrangement.” Ex. 6-J at 2. The 
Court of Appeals for the Eight Circuit affirmed the district 
court’s decision in all respects, except that it reversed the 
district court’s enhancement for risk of loss of the attorneys’ 
fees portion of the award. Ex. 8-J at 287.

On December 21,1993, the defendant in Ms. Hukkanen’s 
Title VII action paid $150,000 in partial satisfaction of that 
judgment, issuing a check in that amount payable to Ms. 
Hukkanen and two of her attorneys. Ms. Hukkanen and her 
attorneys executed a schedule detailing the disbursement of 
the $ 150,000 payment. The total disbursed to Ms. Hukkanen’s 
attorneys was $73,399.25. She received the remainder, 
$76,600.75. App., infra, la; Ex. 9-J.

B. Tax Treatment and Statutory Background

Ms. Hukkanen timely filed her 1993 Federal income tax 
return and paid $20,075 in tax on the $76,601 she received.- 
On April 16, 1998, the Commissioner of Internal Revenue 
issued a statutory notice of deficiency (“Notice”) to Ms. 
Hukkanen. The Notice determined a deficiency of $ 17,402 in 
her 1993 taxable year attributable to the operation of the 
alternative minimum tax. App., infra, 2a.

2 Ms. Hukkanen calculated her tax due by reporting the $ 150,000 as 
income and deducting the $73,399 in attorneys’ fees in full, which, in the 
absence o f  the alternative minimum tax, is the functional equivalent of 
reporting only the $76,601 she received. The $20,075 in tax she paid on 
that $76,601 can be calculated by subtracting the tax she calculated to be 
due on an amended return she later filed (Ex. 2-J), which excluded the 
lawsuit proceeds from her income entirely, from the tax she calculated to 
be due on her original return (Ex. 1-J).

5

The alternative minimum tax, 26 U.S.C. §§ 55-59, applies 
to taxpayers whose “alternative minimum taxable income” 
exceeds an exemption amount. 26 U.S.C. § 55(b)(1)(A). 
“Alternative minimum taxable income” is defined as “taxable 
income” reduced by only a limited list of deductions. 26 
U.S.C. § 55(b)(2). One category of deductions not allowed in 
computing alternative minimum taxable income is 
“miscellaneous itemized deductions”—a “catch-all” category. 
26 U.S.C. §§ 56(b)(l)(A)(i), 67(b). Deductions for attorney’s 
fees paid fall into this disallowed category.

The alternative minimum tax therefore only applies to the 
extent a taxpayer receives “taxable income.” “Taxable 
income” is defined in the Code as “gross income” less certain 
deductions. 26 U.S.C. § 63(a). “Gross income” is defined 
generally as “all income from whatever source derived.” 26 
U.S.C. § 61(a).

The Commissioner of Internal Revenue’s Notice treated 
the entire $ 150,000 paid by the Title VII defendant as taxable 
income to Ms. Hukkanen, and disallowed most of the 
deduction for attorneys’ fees paid pursuant to the alternative 
minimum tax provisions outlined above. Ex. 3-J. The amount 
of tax Ms. Hukkanen paid upon filing her original 1993 
Federal income tax return was the same as that which would 
be calculated by including only the $76,601 she actually 
received in her income.

The operation of the detailed statutory provisions of the 
alternative minimum tax has never been disputed. Rather, the 
point of disagreement between Ms. Hukkanen and the Internal 
Revenue Service was, and continues to be, whether the 
$73,399 of the Title Vll defendant’s $150,000 payment 
retained by Ms. Hukkanen’s attorneys constitutes “income” to 
her under 26 U.S.C. § 61(a).



6

C. Proceedings Below

On July 13, 1998, Ms. Hukkanen timely petitioned the 
United States Tax Court to review the deficiency in tax 
asserted in the Notice.- The Tax Court upheld the deficiency, 
issuing an opinion on June 12, 2000 (App., infra, 6a-18a) and 
entered its decision in favor of the Commissioner of Internal 
Revenue on June 13,2000. Ms. Hukkanen filed a timely notice 
of appeal from that decision on September 8, 2000.- App., 
infra, 2a.

A panel of the Tenth Circuit affirmed the Tax Court’s 
decision in a published opinion issued December 19, 2001. 
The court summarily concluded that “[t]he $150,000 [Ms. 
Hukkanen] recovered in her Title VII suit clearly constitutes 
income from ‘whatever source derived.’” Ibid. While the court 
cited the decisions of the three circuit courts of appeals that 
have reached the opposite result, it noted that “the majority of 
the circuits have rejected” the argument that contingent 
attorneys’ fees paid directly to attorneys do not constitute 
income to those attorneys’ clients, citing decisions of four 
circuits holding against taxpayers on this issue. Id. at 3a.

The Tenth Circuit distinguished two of the three 
conflicting circuit decisions- based upon perceived, but

3 The Tax Court had jurisdiction to review the asserted deficiency 
pursuant to 26 U.S.C. §§ 6123(a), 6214(a) and 7742.

4 The Tenth Circuit had jurisdiction under 26 U.S.C. § 7482(a)(1). 
App., infra, 2a.

5 The Tenth Circuit declined to follow the other contrary circuit court 
of appeals decision holding in favor o f  taxpayers on this issue, a recent 
decision o f the Fifth Circuit, based on (a) that court’s statement that it was 
bound by previous precedent and was not deciding the case as an original 
matter; and (b) purportedly widespread criticism o f the decision, citing

7

unarticulated, differences in the applicable State attorney lien 
statutes (ibid.), but also stated that “[t]he Tax Code mandates 
this result [/.<?., inclusion of the attorneys’ fees in the 
plaintiff s income] irrespective of a particular state’s attorney 
lien statute’s provisions.” Id. at 4a. The court agreed with Ms. 
Hukkanen “that a universal standard independent of the 
‘intricacies of any attorney’s bundle of rights,’ or the unique 
provisions of a particular state’s attorney lien statute is 
desirable.” However, contrary to Ms. Hukkanen’s arguments, 
the Tenth Circuit concluded that the Code required inclusion 
of the attorneys’ fees in Ms. Hukkanen’s taxable income. Ibid.

REASONS FOR GRANTING THE PETITION

This Court should review the Tenth Circuit’s decision 
because the circuits are split over the recurring issue of 
whether contingent attorneys’ fees paid by a defendant to the 
attorneys of a prevailing Title VII plaintiff constitute taxable 
income to the plaintiff, and because the Tenth Circuit’s 
analysis is inconsistent with this Court’s decisions defining the 
scope of the term “income” in the Code.

In determining that the attorneys’ fees paid to Ms. 
Hukkanen’s attorneys constitute income to her, the Tenth 
Circuit failed to apply the extensive framework for 
determining the boundaries of taxable “income” developed in 
decades of decisions of this Court and inferior courts. Under 
those decisions, only income that is sufficiently within a 
taxpayer’s dominion and control can be charged to the 
taxpayer as income.

The contingent attorneys’ fees in this case were outside of 
Ms. Hukkanen’s control. She did not receive the attorneys’

one law review article. App., infra, at 4a.



8

fees portion of the judgment, nor could she ever have received 
it. Rather, the attorneys’ fees portion of the Title VII award 
was properly taxable to her attorneys, who had an undisputed 
right to the proceeds, and who were the principal force behind 
the generation of that income. The Tenth Circuit erred in 
deviating from the well-established tests for allocating income 
to he who earned it. A proper application of those tests to the 
issue raised by Ms. Hukkanen’s case results in the appropriate 
outcome—that reached by the Fifth, Sixth, and Eleventh 
Circuits—that the attorneys’ fees paid by the Title VII 
defendant directly to her attorneys are not income to Ms. 
Hukkanen.

I. THIS COURT SHOULD RESOLVE THE CONFLICT
AMONG THE CIRCUITS OVER THE TAX STATUS
OF CONTINGENT ATTORNEY’S FEES AS
INCOME TO THE ATTORNEY’S CLIENT.

The Tenth Circuit’s opinion cites the decisions of three 
circuits holding that contingent attorney’s fees do not 
constitute income to a successful plaintiff. App., infra, 3a. The 
Tenth Circuit, however, declined to follow those decisions, 
opting instead to adopt the position of other circuits charging 
income to plaintiffs whose attorneys are paid directly by 
lawsuit defendant. Ibid. As a result of the split among the 
circuits recognized by the Tenth Circuit, a taxpayer’s liability 
for Federal income tax varies depending upon the circuit in 
which she resides at the time she files a Tax Court petition.- 
This Court should resolve this conflict among the circuits to

6 The circuit in which a taxpayer resides at the time she files a petition 
with the Tax Court determines the circuit court o f appeals where venue is 
appropriate for an appeal o f  the Tax Court’s decision. 26 U.S.C. 
§ 7482(bXlXA). The Tax Court applies the law o f the circuit to which an 
appeal lies under the “Golsen doctrine.” See Golsen v Commissioner, 54 
T.C. 742, 756-757 (1970), a jfd , 445 F.2d 985 (10th Cir. 1971).

9

promote uniformity in the application of the Federal income 
tax laws and to discourage forum shopping.

A. The Tenth Circuit’s Decision in this Case Directly 
Conflicts With Recent Decisions of the Fifth, 
Sixth, and Eleventh Circuits.

1. Circuits reaching the opposite conclusion to that o f  
the Tenth Circuit

The first case to address whether contingent attorney’s fees 
constitute income to the attorney’s client was Cotnam v. 
Commissioner, 263 F.2d 119 (5th Cir. 1959). In Cotnam, the 
plaintiff, Mrs. Cotnam, successfully sued the estate of T. 
Shannon Hunter, who had promised her one-fifth of his estate 
in exchange for her services as his attendant for the remainder 
of his life. Mrs. Cotnam was awarded $120,000, of which she 
paid $50,365.83, representing a 40 percent contingent fee, plus 
costs, to her attorneys. Id. at 120.

The Fifth Circuit held that the $50,365.83 in attorneys’ 
fees was income to the attorneys, but not to Mrs. Cotnam. 263 
F.2d at 125-126. As a result, Mrs. Cotnam was taxable only on 
the net amount of her award. The court explained:

The only income, the only real economic benefit, which 
Mrs. Cotnam ever received was the $75,254.17 which she 
collected. (In our opinion, it is as illegal as it is unjust to 
tax her on the remaining $50,365.83 which did not pass 
through her hands and of which she never had control.) In 
a realistic sense the remaining $50,365.83 was income of 
the attorneys, not of Mrs. Cotnam.



10

Id. at 126.-

The Fifth Circuit recently reaffirmed the holding of 
Cotnam in Srivastava v. Commissioner, 220 F.3d 353 (5th Cir. 
2000). In Srivastava, the Fifth Circuit dispelled the notion that 
its decision in Cotnam turned upon the peculiarities of the 
attorney lien statute that applied to Mrs. Cotnam’s fee 
agreement with her attorneys (that of Alabama): “Whatever 
are the attorney’s rights against the defendant under Texas law 
as opposed to Alabama law, the discrepancy does not 
meaningfully affect the economic reality facing the taxpayer.” 
Id. at 364. The Fifth Circuit expressly declined the 
Commissioner’s invitation to overrule Cotnam and held that 
the attorney’s fee portion of the taxpayer’s award was not 
taxable as income to him. Id. at 365.

The Eleventh Circuit has similarly recently reaffirmed the 
holding of Cotnam in Barlow-Davis v. Commissioner, 210 
F.3d 1346 (11th Cir. 2000). In Barlow-Davis, the Eleventh 
Circuit also declined the Commissioner of Internal Revenue’s 
invitation to overrule Cotnam. Id. at 1347 n.4; see also Foster 
v. United States, 249 F.3d 1275, 1280-1281 (1 1th Cir. 2001) 
(awarding attorney’s fees to taxpayer because Internal 
Revenue Service’s position that attorney’s fees constituted 
income to the successful plaintiff was “not substantially 
justified” in light of Barlow-Davis and Cotnam). Thus, a 
taxpayer residing in the Eleventh Circuit at the time she files 
her Tax Court petition, unlike a taxpayer, like Ms. Hukkanen,

7 The Fifth Circuit has stated that “[t]he additional language offered 
by Judges Rives and Brown offers the best insight into the majority’s 
reasoning.” Srivastava v. Commissioner, 220 F.3d 353,363 n .31 (5th Cir. 
2000) (referring to the ianguage quoted above).

11

residing in the Tenth Circuit, need not include fees received by 
her attorneys in her taxable income.-

The Sixth Circuit has also weighed in on the question of 
the tax treatment of contingent attorney’s fees, and, like the 
Fifth and Eleventh Circuits, has rejected the Commissioner’s 
argument that contingent attorney’s fees paid by a defendant 
directly to a plaintiffs attorney constitute taxable income to 
the plaintiff. In Estate o f  Clarks v. United States, 202 F.3d 854 
(6th Cir. 2000), the court was faced with the question of 
whether attorneys’ fees attributable to the taxable interest 
component of a non-taxable award should be included in the 
successful plaintiffs income. Contrary to the Tenth Circuit’s 
holding in this case, the Sixth Circuit held that the attorneys’ 
fees portion was not income to the plaintiff-taxpayer. Id. at 
857-858.

The Sixth Circuit held that a client who enters into a 
contingent fee arrangement with an attorney in order to pursue 
a claim has “lost his right to receive payment for the lawyer’s 
portion of the judgment.” 202 F.3d at 856. The court relied 
upon this effect o f the contingent fee arrangement, combined 
with the speculative nature of the attorneys’ engagement, in 
holding that the fees did not constitute income to the taxpayer, 
explaining:

In the instant case, as in Cotnam, the value of taxpayer s 
lawsuit was entirely speculative and dependent on the 
services o f counsel. The claim simply amounted to an 
intangible, contingent expectancy. The only economic 
benefit Clarks could derive from his claim against the

8 The Tax Court has recognized the Eleventh Circuit’s reaffirmation 
o f Barlow-Davis and has applied its holding to cases appealable to that 
circuit under the Golsen doctrine (see supra, n.6) in Griffin v. 
Commissioner, T.C. Memo. 2001-5 (2001).



12

defendant in state court was to use the contingent part of 
it to help him collect the remainder. Like an interest in a 
partnership agreement or joint venture, Clarks contracted 
for services and assigned his lawyer a one-third interest in 
the venture in order that he might have a chance to recover 
the remaining two-thirds. Just as in Cotnam, the 
assignment Clarks’ lawyer received operated as a lien on 
a portion of the judgment sought to be recovered 
transferring ownership of that portion of the judgment to 
the attorney.

Estate o f Clarks, 202 F.3d at 857. The court went on to explain 
why the execution of a contingent fee contract did not 
constitute an ineffective (for tax purposes) anticipatory 
assignment of income, stating that when the taxpayer engaged 
the attorneys, “there was no res, no fund, no proceeds, 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.” Ibid.

All five of these decisions, Cotnam, Srivastava, Barlow- 
Davis, Foster and Estate o f  Clarks, from three different circuit 
courts of appeals, the Fifth, Sixth, and Eleventh Circuits, are 
directly contrary to the Tenth Circuit’s holding in this case.

2. Circuits, besides the Tenth Circuit, reaching the 
opposite conclusion o f that o f the Fifth, Sixth, and 
Eleventh Circuits

The Tenth Circuit is not the first circuit to reach a 
conclusion at odds with the first decision addressing the tax 
treatment o f contingent attorney’s fees, the Fifth Circuit’s 
decision in Cotnam. The Tenth Circuit cited decisions of four 
such circuits in its opinion. App., infra, 3a, citing Kenseth v. 
Commissioner, 259 F.3d 881 (7th Cir. 2001); Young v. 
Commissioner, 240 F.3d 369 (4th Cir. 2001); Coady v.

13

Commissioner, 213 F.3d 1187 (9th Cir. 2000); and Baylin v. 
United States,- 43 F.3d 1451 (Fed. Cir. 1995).

With the exception of the Federal Circuit’s opinion in 
Baylin, which failed to cite or acknowledge the contrary 
precedent of Cotnam, each of the cases cited by the Tenth 
Circuit acknowledged that there was a conflict among the 
circuits. See Kenseth, 259 F.3d at 883 (“The circuits are split 
on whether a contingent fee is, as the Tax Court held in this 
case, a part of the client’s taxable income”); Young, 240 F.3d 
at 377-379 (explicitly rejecting Cotnam and Estate o f  Clarks 
and adopting the “majority” view); Coady, 213 F.3d at 1188- 
1190 (noting that “[t]he rule in Cotnam has been subject to 
disagreement among the circuit courts of appeals,” and 
adopting approach of Baylin).

3. The split among the circuits is not attributable to 
differences in State law.

The Tenth Circuit opinion demonstrates some confusion 
about the role of State law in the Federal income tax 
determinations at issue in this case. On the one hand, the Tenth 
Circuit distinguished Cotnam and Estate o f Clarks as cases in 
which a different State’s law governed the scope of the 
attorney’s lien created by a contingent attorney’s fee contract. 
App., infra, at 3a. On the other hand, the court “agreefd] with 
Petitioner that a universal standard independent of the 
‘intricacies of any attorney’s bundle of rights,’ or the unique 
provisions of a particular state’s attorney lien statute is 
desirable.” Id. at 4a.

Despite the Tenth Circuit’s apparent confusion, courts on 
both sides of the issue have nearly universally agreed that the

9 The Tenth Circuit incorrectly lists the title o f this case as Baylin v. 
Maryland. App., infra, 3a.



14

cases do not turn on State law. The Tenth Circuit itself quoted 
the relevant language from Srivastava, where the court 
declined to distinguish Colnam on the basis of “the intricacies 
of an attorney’s bundle of rights against the opposing party 
under the law of the governing state.” App., infra, at 4a, 
quoting Srivastava, 220 F.3d at 364. After examining the 
Cotnam opinion and rationale, the Fifth Circuit in Srivastava 
declined the Commissioner’s invitation to distinguish Cotnam 
on State law grounds, holding that distinctions regarding the 
scope of an attorney’s power to enforce his rights “should not 
affect the analysis required by the anticipatory assignment of 
income doctrine, which looks to the taxpayer’s degree of 
control and dominion over the asset.” Srivastava, 220 F.3d at 
363-364; see also Estate o f  Clarks, 202 F.3d at 857-858 
(holding for taxpayer on this issue without relying on specific 
operation of State law).

Most courts reaching the same conclusion as the Tenth 
Circuit have been careful to explain that their decisions have 
not been based on differences in State law. For example, the 
Fourth Circuit, in holding against the taxpayer on the issue 
raised in this case, concluded that:

As the Fifth Circuit itself has now recognized [in 
Srivastava], whether amounts paid directly to attorneys 
under a contingent fee agreement should be included 
within the client’s gross income should be resolved by 
proper application of federal income tax law, not the 
amount of control state law grants to an attorney over the 
client’s cause of action.

Young, 240 F.3d at 378-379; see also Sinyard v. 
Commissioner, 268 F.3d 756, 760 (9th Cir. 2001) (rejecting 
Cotnam and stating that “we do not see how the existence of 
a lien in favor of the taxpayer’s creditor makes the satisfaction

15

of the debt any less income”) ;-  c f Kenseth, 259 F.3d at 883- 
884 (relying solely on principles of Federal tax law in reaching 
conclusion).

The reason for courts’ refusal to rely on State law in 
determining the Federal income tax consequences of 
contingent attorney’s fee arrangements is plain. A State-by- 
State standard would require every circuit court of appeals to 
decide the tax effect of every State’s law. See note 6, supra. 
The proper Federal income tax treatment of contingent 
attorney’s fee arrangements requires interpretation and 
application of the Internal Revenue Code. The conflict among 
the circuits cannot be explained as being attributable to 
difference in State law.

8. Resolution of the Conflict among the Circuits Is 
Necessary to Promote Uniform Application of the 
Federal Income Tax Laws on an Important and 
Recurring Issue.

Under the current state of the law, as established by the 
decisions of the Tax Court and the various courts of appeals, 
the tax status of contingent attorney’s fees depends upon the 
taxpayer’s circuit of residence at the time she files a Tax Court 
petition. If the taxpayer lives in the Fifth, Sixth, or Eleventh 
Circuit, she does not recognize income on a defendant’s 
payment made directly to her attorneys. The same taxpayer

10 Prior to its decision in Sinyard, it appears that the Ninth Circuit 
employed a State-by-State approach that required a decision regarding the 
Federal income tax effect o f  each State’s attorney lien law. See Benci- 
Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000) (relying on 
differences in California law); Coady, 213 F.3d at 1190 (relying on 
differences in Alaska law). The Ninth Circuit’s statement in Sinyard 
indicates a departure from this previously-held view.



16

would recognize income if she lived elsewhere in the Nation 
on the petition filing date.—''

This situation is contrary to the principle that the Federal 
income tax laws should be applied uniformly, independent of 
geographic distinctions. The granting of Ms. Hukkanen’s 
request for a writ o f certiorari in this case would promote this 
desired uniformity. See, eg.,  Turnbow v. Commissioner, 368 
U.S. 337, 339 (1961) (certiorari granted “on a matter of 
importance to the proper interpretation and uniform 
application of the Internal Revenue laws”).

The issue upon which the circuits are split is a recurring 
and important question. Obviously, many individuals, like Ms. 
Hukkanen, retain attorneys on a contingent fee basis and 
successfully recover taxable damages from defendants. The 
inclusion of the attorney’s fees portion of any recoveries under 
these agreements in the successful plaintiffs income often 
triggers alternative minimum tax liability, since any deduction 
for attorney’s fees paid is likely to be large in relation to the 
taxpayer’s income for the year of recovery. These results can 
be devastating. As Judge Beghe of the Tax Court has 
observed, “in cases in which the aggregate fees exceed 72-73 
percent of the recovery, the [alternative minimum] tax can 
exceed the net recovery, resulting in an overall effective rate 
of tax that exceeds 100 percent of the net recovery.” Kenseth,
114 T.C. at 421,425-26 (Beghe, J., dissenting).

The circuit split has been widely recognized and the 
desirability of Supreme Court resolution of the issue has been

11 In cases appealable to circuits that have not directly addressed the 
issue raised by this case, the Tax Court has declined to apply the analysis 
of the Fifth, Sixth, and Eleventh Circuits, holding that the attorney’s fees 
are income to the attorney’s client. See, e g., Kenseth v. Commissioner, 
114 T.C. 399 (2000), a jfd , 259 F.3d 881 (7th Cir. 2001).

17

noted by many commentators. See, e.g., Stephen D. Feldman, 
Exclusion o f  Contingent Attorneys' Fees from Gross Income, 
68 U. Chi. L. R e v . 1309, 1336 (2001) (“To resolve the circuit 
split and create a uniform doctrine, courts should permit 
exclusion of contingent attorneys’ fees from a plaintiffs gross 
income in all cases”); Lauren E. Sheridan, Trees in the 
Orchard or Fruit from the Trees?: The Case for Excluding 
Attorneys’ Contingent Fees from the Client's Gross Income, 
36 Ga . L. R e v . 283, 287 (2001) (“There remains a deep split 
between the federal courts of appeal regarding the taxation of 
attorneys’ contingent fees to clients”); Benjamin C. 
Rasmussen, Taxation o f an Attorney's Contingency Fee o f  a 
Punitive Damages Recovery: The Srivastava Approach, 15 
BYU J. Pub. L. 301,301 (2001) (“Recently, a noticeable split 
has occurred in the federal circuit courts * * * . This dispute 
between the circuits seems ripe for determination by the 
United States Supreme Court”).

The importance of the issue and the harsh effects of the 
result reached by the Tenth Circuit in this case have also 
received national media attention. See, eg. ,  David Cay 
Johnston, A “Stealth Tax" Is Creeping Up on Growing 
Numbers o f  Americans, N.Y. TIMES, Feb. 17, 2002, Sec. 3, at 
17; see also Doug Clark, Hero Fought O ff One Robber, Now 
Facing IRS, S p o k a n e  S p o k e s m a n -R e v ie w , Apr. 29,2001, at 
B1 (describing alternative minimum tax application to 
contingent attorneys fees and concluding that “[a]s crazy as it 
sounds, however, this AMT business all depends on your 
address”); Tom Herman, Tax Report, WALL St . J., Aug. 2, 
2000, at A1 (labeling the circuit split on this issue “a 
confusing jumble that the Supreme Court may have to 
untangle”).

The resolution of the split among the circuits is crucial to 
the uniform application of the Federal tax laws in an important



18

area of tax law. This Court should grant the petition for a writ 
of certiorari to settle the issue.

II. THIS COURT SHOULD REVERSE THE TENTH 
CIRCUIT’S ERRONEOUS APPLICATION OF THE 
T E ST S FOR I N C O M E  R E C O G N I T I O N  
ESTABLISHED BY THIS COURT’S DECISIONS.

The Tenth Circuit’s decision in this case is contrary to the 
tests for income recognition developed by this Court over the 
decades. Although the Tenth Circuit failed to even mention 
any of this Court’s decisions defining the boundaries of 
“income,” the court of appeals’ rationale is contrary to those 
decisions. The Tenth Circuit summarily rejected Ms. 
Hukkanen’s argument that she cannot be charged with income 
because she lacked the requisite dominion and control of the 
attorneys’ fees portion of the lawsuit proceeds. App., infra, 3a. 
Because the Tenth Circuit’s summary conclusion is contrary 
to this Court’s decisions, this Court should grant the petition 
for a writ of certiorari and reverse that court’s decision.

A. Under the Tests for Income Recognition 
Established by this Court’s Opinions, the 
Attorneys’ Fees Paid to Ms. Hukkanen’s 
Attorneys Do Not Constitute Income to Her.

It is well-established that income cannot be attributed to a 
taxpayer who does not have a high degree of control over the 
source of the income. In retaining attorneys through a 
contingent fee arrangement, Ms. Hukkanen relinquished the 
control necessary to saddle her with the income tax burdens of 
the attorneys’ fees portion of the proceeds. Her attorneys, by 
the contingent fee contract and the relevant attorney lien 
statute, obtained a property interest—a lien on the sexual 
harassment cause of action. Her attorneys had practical 
control over the cause of action, which had not ripened into a

19

valuable right prior to their intervention in the sexual 
harassment dispute. When the lawsuit defendant tendered a 
check made payable to the attorneys and Ms. Hukkanen, Ms. 
Hukkanen had no power to divest the attorneys of their portion 
of the payment. Accordingly, the attorneys’ fees portion of the 
payment did not constitute income to Ms. Hukkanen.

1. Income cannot be attributed to a taxpayer who does 
not have control over the source o f  the income.

This Court has clearly established that unfettered control 
is the hallmark of income. In determining whether a taxpayer 
had transferred property or merely the right to receive income, 
it has explained:

The crucial question remains whether the assignor retains 
sufficient power and control over the assigned property or 
over receipt of the income to make it reasonable to treat 
him as the recipient of the income for tax purposes.

Commissioner v. Sunnen, 333 U.S. 591, 604 (1948). 
Similarly, the test has been summarized:

The income that is subject to a man’s unfettered command 
and that he is free to enjoy at his own option may be taxed 
to him as his income, whether he sees fit to enjoy it or not.

Corliss v. Bowers, 281 U.S. 376, 378 (1930).

The control test has been used to identify situations where 
receipt of money does not give rise to income. For example, it 
is well-established that receipt of a loan does not give rise to 
income to the borrower because of the obligation to repay the 
funds. See Commissioner v. Tufts, 461 U.S. 300, 307 (1983). 
However, an advance payment of the purchase price of goods 
constitutes income to the seller of the goods. In Commissioner



20

v. Indianapolis Power & Light Co., 493 U.S. 203, 208-209 
(1990), this Court applied this economic “distinction * * * of 
degree rather than of kind” by applying a “complete 
dominion” test to determine whether a taxpayer recognized 
income. The Court observed that the issue “turns upon the 
nature of the rights and obligations” of the purported recipient 
of income. Id. at 209. If the funds received are not 
‘“undeniable accessions to wealth, clearly realized, and over 
which the taxpayers have complete dominion,’” they do not 
constitute income to the recipient. Ibid, (quoting 
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 
(1955)). The “key” to determining whether a taxpayer enjoys 
“complete dominion” is “whether the taxpayer has some 
guarantee that he will be allowed to keep the money.” 
Indianapolis Power & Light Co., 493 U.S. at 210.

As explained in the following section, Ms. Hukkanen did 
not have complete dominion and control over the portion of 
the lawsuit proceeds she pledged to her attorneys in the 
contingent fee agreement. She also was she the indefeasibly 
vested owner of her attorneys’ portion of the award. Amounts 
over which she did not have complete control should not be 
included in her income.

2. Ms. Hukkanen did not have the control o f  the 
attorneys' fees portion o f  her lawsuit required to 
charge her with receipt o f income.

Ms. Hukkanen entered into a contingent fee contract with 
the attorneys who represented her in the sexual harassment 
lawsuit and subsequent appeal. The contract provided that Ms. 
Hukkanen’s attorneys would receive at least 45 percent of any 
recovery. Ex. 7-J. The contract also contained the following 
provision under the heading “Lien On the Claim”:

21

Attorneys will have a lien of [sic] the claim for the 
amounts stated above in the event of recovery, or, if no 
recovery is effected prior to his termination or withdrawal, 
the lien shall be for $150 per hour for all hours plus all 
unpaid expenses.

Id. The contractual lien on the cause of action was buttressed 
by Missouri law.—''

Ms. Hukkanen’s attorneys had a contractual and statutory 
lien on the attorneys’ fees portion of the Title VII cause of 
action. At the time the defendant tendered a check for 
$150,000 payable to the attorneys and Ms. Hukkanen, the lien 
had already attached. Ms. Hukkanen had no legal right to 
divest her attorneys of their portion of the lawsuit proceeds. 
The attorneys’ fees portion of the $150,000 check was never 
within Ms. Hukkanen’s control. As set forth in the previous 
section, this absence of complete control mandates that Ms. 
Hukkanen not be attributed income on account of the payment 
to her attorneys. See Corliss, 281 U.S. at 378 (“income that is 
subject to a man’s unfettered command and that he is free to 
enjoy at his own option may be taxed to him as his income”). 
If anyone had “complete dominion” over the attorneys’ fees

12 The applicable Missouri statute provided that:

The compensation o f  an attorney or counselor for his services 
is governed by agreement, express or implied, which is not 
restrained by law. From the commencement o f  an action or the 
service o f  an answer containing a counterclaim, the attorney 
who appears for a party has a lien upon his client’s cause of 
action or counterclaim, which attaches to the verdict, report, 
decision or judgment in his client’s favor, and the proceeds 
thereof in whosoever hands they may come; and cannot be 
afTected by any settlement between the parties before or after 
judgment.

Mo. Ann. Stat. § 484.130 (West 1987).



22

portion of the proceeds, it was Ms. Hukkanen’s attorneys, not 
her. See Indianapolis Power & Light Co., 493 U.S. at 209-210.

This Court should grant a writ of certiorari and reverse the 
Tenth Circuit’s misapplication of this Court’s precedent. Ms. 
Hukkanen did not have the control of the attorneys’ fees 
portion of her lawsuit necessary to include those fees in her 
income.

3. The assignment o f  income doctrine is inapplicable to 
Ms. Hukkanen's retention o f attorneys on a 
contingent fee basis.

Nothing in the language of the Internal Revenue Code 
requires that the attorneys’ fees portion of the lawsuit proceeds 
be attributed to Ms. Hukkanen. The only rationale under which 
the attorneys’ fees could represent income to Ms. Hukkanen 
is the judicial “assignment of income” doctrine. The 
assignment of income doctrine originated in this 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, 281 U.S. 111 (1930). This Court has noted that 
the process of applying the assignment of income control test 
and “drawing the line” between legitimate transfers and 
assignments of income is “a recurrent difficulty.” Harrison v. 
Schaffner, 312 U.S. 579, 583 (1941); see also Jones v. 
Commissioner, 306 F.2d 292,296 (5th Cir. 1962) (“In seeking 
to reconcile the implications of the infinite variety of facts 
presented by the decided cases and all that has been said about 
the subject of anticipatory assignment of income, one is likely 
to be displeased with his own wits; and may find his mind 
teetering between conflicting conclusions”).

Courts, regardless of their resolution of the issues, have 
frequently observed that the application of the assignment of 
income doctrine to attorneys’ fees for alternative minimum tax

23

purposes produces harsh results. For example, the Tax Court 
in Kenseth, in an 8-5 split decision, held that attorneys’ fees 
should be included in a plaintiffs income, despite 
acknowledging that “[c]ommentators and courts have long 
observed [the] potential for unfairness in the operation of the 
AMT in this [area].” Kenseth, 114 T.C. at 407 n.3. The Court 
of Appeals for the First Circuit has also noted that the 
application of the alternative minimum tax to individual 
taxpayers’ deduction of legal expenses “smacks of injustice.” 
Alexander v. IRS, 72 F.3d 938, 946 (1st Cir. 1995). There is 
no reason for this Court to perpetuate the injustice 
acknowledged by the Tax Court in Kenseth by applying the 
judicial assignment of income doctrine to Ms. Hukkanen in 
this case.

The assignment of income doctrine originated with 
Supreme Court cases involving intra-family transactions such 
as Lucas v. Earl, Helvering v. Horst, and Sunnen. In those 
cases, this Court thwarted taxpayer attempts to shift income 
within a family group. In Lucas v. Earl, the court applied the 
assignment of income doctrine to a situation in which a 
husband contracted to give his wife one-half of his future 
employment income. See 281 U.S. at 114-115. The taxpayer 
in Helvering v. Horst unsuccessfully attempted to shift income 
by detaching interest coupons from his bonds and giving them 
as a gift to his son. See 311 U.S. at 114. Sunnen involved a 
husband’s transferring patent licensing contracts to his wife. 
See 333 U.S. at 595.

The assignment of income doctrine is particularly 
applicable to intra-family transfers because a taxpayer is 
presumed to retain dominion and control over income that 
remains within his family. Under such circumstances, the 
taxpayer is still able to enjoy the full benefit of the income. 
Stated differently, after an intra-family transfer, the transferor 
“retains sufficient power and control over the assigned



24

property or over receipt of the income to make it reasonable to 
treat him as the recipient of the income for tax purposes.” 
Sunnen, 333 U.S. at 604.

Another situation in which retention of control makes the 
assignment of income doctrine applicable is in assignments of 
personal services income. Even where a taxpayer assigns the 
income from his services to an unrelated party, courts tax the 
income to the person who performed the services and, 
therefore, earned the income. This treatment is grounded in 
the policy that the tax law should “tax salaries to those who 
earned them.” Earl, 281 U.S. at 114. Thus, courts have not 
allowed taxpayers to avoid taxation by assigning personal 
services income. See, eg.,  Eubank, 311 U.S. at 124 (assigned 
insurance commissions payable for services rendered are 
income to transferor).

None of the traditional elements of an assignment of 
income case are present in Ms. Hukkanen’s case. The 
contingent fee contract she entered into with her attorneys was 
an arm’s-length transaction entered into for legitimate non-tax 
purposes. She did not perform any of the services from which 
the attorneys’ fees arose, and she lacked the dominion and 
control over the attorneys’ fees portion of the Title VII lawsuit 
necessary to trigger the inclusion of income. The assignment 
of income doctrine is therefore inapplicable and the Tenth 
Circuit’s decision should be reversed.

Furthermore, the assignment o f income doctrine is 
inapplicable to situations where the property right assigned is 
exceedingly contingent or speculative at the time of 
assignment. For example, in Cold Metal Process Co. v. 
Commissioner, 247 F.2d 864 (6th Cir. 1957), the court was 
faced with the tax consequences of Cold Metal’s transfer of its 
interest in royalty payments that were being held pending a 
government cancellation suit seeking to invalidate the patents

25

at issue. The Sixth Circuit determined that Cold Metal did not 
recognize income upon the ultimate favorable resolution of the 
suit with the government and release of the royalties. It 
reasoned that the assignment of income doctrine did not apply 
because, at the time of the transfer, the claim for the royalties 
“was not income to Cold Metal”—“[i]t was an unliquidated 
chose in action.” Id. at 872; see also Jones v. Commissioner, 
306 F.2d 292, 301 (5th Cir. 1962) (where claim at the time of 
transfer was “uncertain, doubtful and contingent,” the 
transferor had no income upon the subsequent recovery on the 
claim under the assignment of income doctrine).

The assignment of income doctrine is not applicable to the 
arm’s-length transaction at issue in this case— Ms. 
Hukkanen’s hiring of attorneys on a contingent fee basis. Ms. 
Hukkanen’s claim was worthless without her attorneys’ 
efforts. Even when those attorneys agreed to handle her case 
on a contingent fee basis, there was no guarantee that Ms. 
Hukkanen even had a valid claim. The assignment of income 
doctrine is not applicable to the assignment of speculative, 
inchoate rights, such as those possessed by Ms. Hukkanen at 
the time of the purported ineffective assignment. This Court 
should grant a writ of certiorari in order to correct the Tenth 
Circuit’s (and other courts of appeals’) misapplication of this 
Court’s income recognition and assignment of income 
precedents.

B. The Tenth Circuit’s Decision Leads to Absurd 
Results at Odds with the Legislative Purposes of 
the Alternative Minimum Tax and Title VII.

In this case, the language used in the statute at issue 
(“income” in 26 U.S.C. § 61(a)) is far from clear. But, even in 
situations where the plain language used in a statute is clear, 
it is well-established that a statute should not be construed to 
produce absurd results. See United States v. Brown, 333 U.S.



26

18, 27 (1948) (“No rule of construction necessitates our 
acceptance of an interpretation resulting in patently absurd 
consequences”). The Tenth Circuit’s interpretation of section 
61 and the alternative minimum tax provisions and application 
of the judicial assignment of income doctrine leads to absurd 
results both in this case and when applied to other plaintiff- 
taxpayers.- These absurd results contravene the legislative 
purposes of both the alternative minimum tax and Title VII.

The Tax Court and the Tenth Circuit in this case held that 
the portion of the proceeds paid directly to Ms. Hukkanen’s 
attorneys was taxable to her for purposes of computing her 
alternative minimum tax liability. If those decisions stand, the 
$150,000 payment made by the sexual harassment lawsuit 
defendant will be divided up as follows:

$150,000 Total Payment
-$73,399 Attorneys’ Fees
-$20,075 Regular Tax Paid with Return
-$ 17,402 Additional Tax Attributable to AMT
$39,124 Amount Ms. Hukkanen Received

Under the Tenth Circuit’s holding, Ms. Hukkanen will net 
26 percent (before considering the substantial accrued interest 
on the additional tax liability) of the $ 150,000 payment instead 
of the 38 percent she would have netted in the absence of the 
imposition of the asserted alternative minimum tax deficiency. 
The result of the Tenth Circuit’s statutory interpretation is 
absurd.

13 This is not a case in which applying a statute written by Congress 
produces such a result. As explained above, the assignment o f  income 
doctrine is a court-fashioned rule. Accordingly, it is clearly within the 
Court’s purview to temper its application to avoid unjust, illogical results.

27

Even more absurd, however, are the results of the Tenth 
Circuit’s holding when applied to plaintiff-taxpayers whose 
attorneys retain larger percentage contingent fees. As Judge 
Beghe noted in his dissent in Kenseth, “in cases in which the 
aggregate fees exceed 72-73 percent of the recovery, the tax 
can exceed the net recovery, resulting in an overall effective 
rate of tax that exceeds 100 percent of the net recovery.” 
Kenseth, 114 T.C. at 421,425-426 (Beghe, J., dissenting).

Regardless o f the exact calculation, it is certainly possible 
that plaintiffs could receive a net recovery of less than zero 
under the Tenth Circuit’s methodology. This danger is 
especially high in discrimination lawsuits, where actual 
damages may be low but the societal interest in the outcome 
and corresponding attorneys’ fees are high.

The Tenth Circuit’s holding in this case is contrary to the 
legislative purpose of the alternative minimum tax. The 
current version of the individual alternative minimum tax was 
enacted as part of the Tax Equity and Fiscal Responsibility 
Act of 1982. The Senate Finance Committee Report for that 
act explained the purpose of the revised alternative minimum 
tax:

The committee has amended the present minimum tax 
provisions applying to individuals with one overriding 
objective: no taxpayer with substantial economic income 
should be able to avoid all tax liability by using 
exclusions, deductions and credits. * * * The ability of 
high-income individuals to pay little or no tax undermines 
respect for the entire tax system and, thus, for the incentive 
provisions themselves.

S. REP. No . 97-494, VOL. 1, at 108 (1982). These purposes 
were reiterated by Congress when it amended the alternative



28

minimum tax with the Tax Reform Act of 1986, Pub. L. No. 
99-514. See S. Rep. No . 99-313, at 520 (1986).

Ms. Hukkanen is not a “high-income individual” 
attempting to “avoid” taxation on “substantial economic 
income” by excluding the payment to her attorneys from her 
income. First, the payment directly to her attorneys, over 
which she had no control, did not enhance her financial 
condition at all. She received no economic income from the 
payment to her attorneys. Second, Ms. Hukkanen has hardly 
“avoided” taxation by paying an effective tax rate of 26 
percent on the net proceeds of the award, rather than the 49 
percent effective rate imposed under the Tax Court’s holding.

Ms. Hukkanen paid regular income tax on the amount that 
was paid to her—her true “economic income.” The Tenth 
Circuit’s holding results in her being taxed on the payment by 
the defendant to her attorneys. This absurd result conflicts 
with the legislative purpose of the alternative minimum tax 
and should be reversed.

The Tenth Circuit’s decision also undermines the 
legislative purposes behind Title VII. Title VII of the Civil 
Rights Act of 1964 was enacted to combat discrimination in 
employment. See International Bhd. o f Teamsters v. United 
States, 431 U.S. 324, 348 (1977). Title VII contains a “fee- 
shifting” provision, 42 U.S.C. § 2000e-5(k), that was intended 
to encourage potential plaintiffs to bring meritorious suits.- 
A Title VII plaintiff such as Ms. Hukkanen acts not just for 
herself, but also as a “private attorney general,” vindicating 
national policy. See Newman v. Piggie Park Enters., 390 U.S. 
400, 402 (1968); see also Christiansburg Garment Co. v.

14 In Ms. Hukkanen’s case, the district court awarded $85,227 in 
attorney’s fees under 42 U.S.C.A. § 2000e-5(k). Ex. 6-J at 2. This amount 
was reduced on appeal. Ex. 8-J.

29

EEOC, 434 U.S. 412,418 (1978) (the Title VII plaintiff is the 
“chosen instrument of Congress to vindicate ‘a policy that 
Congress considered of the highest priority’” (citing Piggie 
Park)). Ms. Hukkanen should not be penalized for assuming 
this role.

The Tenth Circuit’s decision in this case undermines the 
purpose of Title VII generally and the purpose of the fee- 
shifting provision of Title VII specifically.— By treating 
plaintiff-taxpayers as receiving income from payments to their 
attorneys, the Tenth Circuit’s holding discourages plaintiffs 
with meritorious discrimination claims from bringing suit, 
even when the possibility of an award of attorneys’ fees is 
taken into account. An award of attorneys’ fees results in 
additional tax liabilities for successful plaintiffs under the 
Tenth Circuit’s holding in this case. These additional tax 
liabilities can easily make meritorious suits economically 
infeasible to pursue.

In addition to its other errors, the Tenth Circuit’s decision 
leads to absurd results inconsistent with the purpose of the 
alternative minimum tax and undermines Title VII.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

15 Commentators agree. See, e g ,  Laura Sager & Stephen Cohen, How 
the tricorne Tax Undermines Civil Rights Law, 73 S. Cal. L. Rev. 1075 
( 2000) .



30

R o g e r  J. Jo n e s  
Counsel o f Record 

R u s s e l l  R . Y o u n g  
Mayer, Brown, Rowe & Maw 
190 South LaSalle Street 
Chicago, Illinois 60603 
(312) 782-0600

Counsel for Petitioner

APPENDIX



la

UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT

No. 00-9030

N a n c y  J. H u k k a n e n -C a m p b e l l , 
Petitioner-Appellant,

v.

C o m m is s io n e r  o f  In t e r n a l  R e v e n u e , 
Respondent-Appellee.

Appeal from the Decision of the 
United States Tax Court 

(T.C. Docket No. 12371-98)

[Filed December 19, 2001]

Before KELLY and McKAY, Circuit Judges, and BROWN, 
Senior District Judge.’

McKAY, Circuit Judge.

Petitioner prevailed in a Title VII lawsuit against her former 
employer. The defendant in that action paid Petitioner 
$ 150,000 in partial satisfaction of the judgment. The $ 150,000 
payment was issued jointly to Petitioner and her attorneys. She 
received $76,600.75 of the settlement; her attorneys retained 
the remaining $73,399.25 as legal fees.

Honorable Wesley E. Brown, Senior United States District Judge for the 
District o f  Kansas, sitting by designation.



2a

Originally, Petitioner reported the entire $ 150,000 as “Other 
Income” on her 1993 federal income tax return. She also 
claimed an itemized deduction for the legal fees. In 1995, she 
filed an amended tax return in which she excluded the $ 150,000 
payment from her income entirely, claiming a refund of 
$20,075. The Commissioner denied the refund and issued to 
her a deficiency notice in the amount of $17,402. This 
deficiency resulted from the application of the Alternative 
Minimum Tax (“AMT”). The AMT precludes various 
miscellaneous itemized deductions including fees paid to 
attorneys by taxpayers.

Petitioner challenged the deficiency in Tax Court arguing 
that the proceeds of the lawsuit were excluded from income 
under § 104(a)(2). Alternatively, she argued that the portion 
paid to her attorneys pursuant to her contingent fee arrangement 
was not includable in gross income. The Tax Court held that 
the entire $ 150,000 was subject to taxation and that the amount 
paid to her attorneys qualified as a miscellaneous itemized 
deduction. However, since the computation of the AMT 
disallows deductions for attorney fees, the Tax Court upheld the 
$17,402 deficiency. Petitioner timely appealed. We have 
jurisdiction under 26 U.S.C. § 7482(a)(1).

The current dispute has increased meaning because of the 
AMT’s treatment of attorney fees. If the AMT did not apply, 
any fees Petitioner paid to her attorneys would qualify as a 
deductible expense. However, under the AMT’s provisions, 
certain miscellaneous deductions, including attorney fees, are 
eliminated.

Petitioner argues that the Internal Revenue Code does not 
require that the payment made to her attorneys be included in 
her income. Section 61 (a) of the Code defines gross income as 
“all income from whatever source derived.” 26 U.S.C. § 61(a). 
The $150,000 she recovered in her Title VII suit clearly 
constitutes income from “whatever source derived.”

3a

We reject Petitioner’s argument that she lacked the requisite 
control and beneficial ownership of the funds paid directly to 
her attorney. Regardless of the label placed on the contract 
between Petitioner and her attorneys, the end result is that the 
recovery of legal fees benefited her. This recovery permitted 
Petitioner to discharge the personal obligation owed to her 
attorneys. See Coady v. Commissioner, 213 F.3d 1187, 1191 
(9th Cir. 2000); Baylin v. United States, 43 F.3d 1451, 1454 
(Fed. Cir. 1995).

Petitioner’s argument that the effect of her contingent fee 
agreement and the Missouri lien statute alters the analysis is 
equally unavailing. Petitioner points to rulings in other circuits 
holding that contingent fees paid directly to attorneys are not 
taxable income based on the applicable attorney lien statutes. 
See, e g., Foster v. United States, 249 F.3d 1275 (11th Cir. 
2001) (Alabama statute); Estate o f Clarks v. United States, 202 
F.3d 854 (6th Cir. 2000) (Michigan statute); Cotnam v. 
Commissioner, 263 F.2d 119 (5th Cir. 1959) (Alabama statute). 
However, the majority of the circuits have rejected this 
argument. See, e g., Kenseth v. Commissioner, 259 F.3d 881 
(7th Cir. 2001) (Wisconsin statute); Young v. Commissioner, 
240 F.3d 369 (4th Cir. 2001) (North Carolina statute); Benci- 
Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000) 
(California statute); Coady v. Commissioner, 213 F.3d 1187 
(9th Cir. 2000) (Alaska statute); Baylin v. Maryland, 43 F.3d 
1451 (Fed. Cir. 1995) (Maryland statute).

Furthermore, the cases Petitioner relies upon are readily 
distinguished. As the Tax Court correctly noted, the Missouri 
lien statute, unlike the Alabama and Michigan statutes, does not 
create a proprietary interest in the recovery on the attorney’s 
behalf. Instead, the Missouri statute simply operates as a 
manner of ensuring payment to the attorney. As the Seventh 
Circuit recently observed, an attorney with a lien on settlement 
“is no different in this respect from any other trade creditor 
stiffed by his debtor.” Kenseth, 259 F.3d at 884.



4a

Petitioner urges us to adopt a uniform standard that 
contingent fee payments made directly to attorneys for their 
services should not be taxable to successful plaintiffs. She 
advocates a standard independent of “the intricacies of an 
attorney’s bundle of rights against the opposing party under the 
law of the governing state.” Aplt. Brief at 25 (quoting 
Srivastava v. Commissioner, 220 F.3d 353,364 (5th Cir. 2000). 
Her reliance on Srivastava is misplaced. In Srivastava, the 
Fifth Circuit specifically stated, “[W]ere we to decide this case 
as an original matter, we might apply the anticipatory 
assignment doctrine to hold that contingent fees are gross 
income to the client. We do not, however, decide this case on 
a clean slate, but must follow the contrary approach endorsed 
in Cotnam. Srivastava, 220 F.3d at 363. Not only has the 
Fifth Circuit s ruling in Srivastava been widely criticized, see, 
eg., Benjamin C. Rasmussen, Note, Taxation o f  an Attorney's 
Contingency Fee o f  a Punitive Damages Recovery: The 
Srivastava Approach, 15 BYU J. Pub. L. 301 (2001), but we, 
unlike the Fifth Circuit, decide this case on a clean slate.

We agree with Petitioner that a universal standard 
independent o f the “intricacies of any attorney’s bundle of 
rights,” or the unique provisions of a particular state’s attorney 
lien statute is desirable. However, her proposed solution is 
inconsistent with the Tax Code. The correct approach is much 
more simple. Petitioner’s judgment is a recovery of lost 
income; the attorney fees she paid represent expenses incurred 
in generating that income. Like any other taxpayer, Petitioner 
must report the entire amount as gross income, and, but for the 
AMT’s provisions, she would be allowed to deduct her attorney 
fees as an expense. The Tax Code mandates this result 
irrespective of a particular state’s attorney lien statute’s 
provisions.

Finally, Petitioner invites us to judicially overturn what she 
terms an “anomalous and unjust result” created by the 
application o f the AMT to the present case. We must reject 
this invitation. The perceived inequities of the AMT are simply

5a

not at issue here. Congress, not this court, must correct any 
shortcomings in the AMT’s application.

The Tax Court’s decision is AFFIRMED.



6a

UNITED STATES TAX COURT

Docket No. 12371-98

N a n c y  J. H u k x a n e n -C a m p b e l l , 
Petitioner,

v.

C o m m is s io n e r  o f  In t e r n a l  R e v e n u e , 
Respondent.

Filed June 12, 2000.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Judge: In a notice of deficiency addressed to 
petitioner, respondent determined a deficiency of $17,402 in 
petitioner’s Federal income tax for the year ended 
December 31, 1993. The issues for our consideration are: (1) 
Whether petitioner’s $150,000 judgment received in an action 
under the pre-1991 title VII of the Civil Rights Act of 1964, 
Pub. L. 88-352, 78 Stat. 241 (title VII), is excludable from 
gross income under section 104(a)(2); and (2) if the title VII 
proceeds are includable in income, whether petitioner is entitled 
to exclude from gross income that portion of the proceeds paid 
as attorney’s fees under her contingent fee retainer agreement.

7a

FINDINGS OF FACT1

The facts in this case have been fully stipulated, and the case 
was submitted to the Court under Rule 122.2 Petitioner resided 
in Shawnee, Kansas, at the time her petition was filed in this
case.

Petitioner was employed at the International Union of 
Operating Engineers, Hoisting and Portable Local No. 101 
(Local 101) from July 10, 1978, to October 29, 1984. On 
May 23, 1990, petitioner filed a Complaint in the U.S. District 
Court for the Western District of Missouri, Western Division, 
against Local 101 and against Sam F. Long (Long), the Chief 
Executive Officer of Local 101 during petitioner’s employment. 
Petitioner’s Complaint contained the allegation that, in 1984, 
she was constructively discharged in violation of title VII. 
Petitioner sought injunctive relief, backpay, front pay (the 
monetary equivalent of reinstatement), benefits, attorney’s fees, 
and reasonable costs.

The District Court ruled in favor of petitioner and found that 
petitioner had been subjected to unwelcome sexual harassment 
based on petitioner’s gender and that such harassment was 
sufficiently severe and pervasive so as to unreasonably interfere 
with her work performance and create an intimidating, hostile, 
and offensive work environment. The District Court entered a 
Final Judgment on April 3, 1992, awarding petitioner $52,492 
in backpay, $44,418.06 in front pay, $82,534.81 in pension 
benefits, $85,227.50 in attorney’s fees, and $1,016.90 in 
reasonable costs. Local 301 and Long appealed, and petitioner 
cross-appealed, to the U.S. Court of Appeals for the Eighth 
Circuit. The Court of Appeals upheld the backpay, front pay,

' The stipulation o f facts and the attached exhibits are incorporated herein 
by this reference.

2 Unless otherwise indicated, Rule references are to this Court’s Rules of 
Practice and Procedure, and section references are to the Internal Revenue 
Code in effect for the taxable year in question.



8a

and pension benefits, and remanded the attorney’s fees award 
to the District Court for further consideration. See Hukkanen v. 
International Union o f  Operating Engrs., Hoisting & Portable 
Local Ho. 101, 3 F.3d 281 (8th Cir. 1993).

In connection with petitioner’s lawsuit, petitioner and her 
attorneys entered into a Contract for Employment for Litigation 
on a Contingency Fee Basis (contingency fee contract). The 
contingency fee contract provided that petitioner’s attorneys 
would receive 45 percent of the total recovery, including 
attorney s fees, or $ 125 per hour for all time from the beginning 
of the case to completion, or the court-awarded fee, whichever 
figure was greater, plus any expenses that were not paid by 
petitioner. In no event, however, was petitioner to receive less 
than 25 percent of the combined award of attorney’s fees and 
client award after deduction of expenses.

On December 21, 1993, Local 101 paid petitioner $150,000 
in partial satisfaction of the title VII judgment. The payment 
was made jointly to petitioner and her attorneys. Ultimately, 
$76,600.75 was retained by petitioner, and $73,399.25, as legal 
fees, was retained by petitioner’s attorneys.

Petitioner timely filed her Federal income tax return for the 
1993 taxable year (1993 original return) and reported the entire 
$150,000 judgment as “Other income” and reported the 
$73,399.25 in attorney’s fees as a miscellaneous itemized 
deduction. In 1995, petitioner filed an Amended U.S. Individual 
Income Tax Return, Form 1040X, for the 1993 taxable year, 
excluding the $150,000 judgment from income, thereby 
eliminating the need to claim the $73,399.25 in attorney’s fees. 
As a result, petitioner reported that her corrected tax liability 
was $437, that she had paid $20,512, and that she was entitled 
to a refund o f $20,075.

OPINION

Respondent determined that petitioner’s 1993 gross income 
included the $150,000 award. Respondent also determined that

9a

petitioner’s legal fees and costs totaling $73,399.25 were 
deductible as a miscellaneous itemized deduction, subject to the 
2-percent floor under section 67. Respondent did not allow the 
miscellaneous itemized deduction for legal fees in computing 
petitioner’s alternative minimum taxable income. Thus, under 
respondent’s determination, petitioner would be subject to 
alternative minimum tax (AMT), under sections 55 and 56, of 
$17,402. Petitioner contends that the $150,000 award is 
excludable from income, or alternatively, if the award is not 
excludable, the portion of the award paid as attorney’s fees is 
excludable from income, and petitioner is not liable for AMT.

Excludability o f  Title VII Judgment Proceeds

We must first decide whether petitioner’s title VII judgment 
proceeds are excludable from gross income. Except as 
otherwise provided, gross income includes income from all 
sources. See sec. 61(a); Commissioner v. Glenshaw Glass Co., 
348 U.S. 426 (1955). Although section 61(a), concerning the 
inclusion of income, has been broadly construed, statutory 
exclusions from income have been more narrowly construed. 
See Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995); 
Kovacs v. Commissioner, 100 T.C. 124, 128 (1993), affd. 
without published opinion 25 F.3d 1048 (6th Cir. 1994).

One such statutory exclusion appears in section 104(a)(2). 
Under section 104(a)(2), gross income does not include “the 
amount of any damages received (whether by suit or agreement 
and whether as lump sums or as periodic payments) on account 
of personal injuries or sickness”. The regulations provide that

The term “damages received (whether by suit or 
agreement)” means an amount received (other than 
workmen’s compensation) through prosecution of a legal 
suit or action based upon tort or tort type rights, through 
a settlement agreement entered into in lieu of such 
prosecution.



10a

Sec. 1.104-1(c), Income Tax Regs. Thus, damages may be 
excluded from gross income only if petitioner shows that (1) 
the underlying cause of action giving rise to the recovery is 
based upon tort or tort type rights, and (2) the damages were 
received on account of personal injuries or sickness. See 
Commissioner v. Schleier, supra at 336-337; Wesson v. United 
States, 48 F.3d 894, 901-902 (5th Cir. 1995); Bagley v. 
Commissioner, 105 T.C. 396, 416 (1995), affd. 121 F 3d 393 
(8th Cir. 1997).

When damages are received pursuant to a suit or settlement 
agreement, the nature of the underlying claim determines 
whether such damages are excludable under section 104(a)(2). 
See United States v. Burke, 504 U.S. 229 (1992); Thompson v. 
Commissioner, 866 F.2d 709, 711 (4th Cir. 1989), affg. 89 T.C. 
632 (1987); Robinson v Commissioner, 102 T.C. 116, 126 
(1994), affd. in part, revd. in part, and remanded on another 
ground 70 F.3d 34 (5th Cir. 1995). Determining the nature of 
the claim is a factual inquiry. See Bagley v. Commissioner, 
supra at 406; Stocks v. Commissioner, 98 T.C. 1,11 (1992). 
The claim must be bona fide, but not necessarily valid. See 
Taggi v. United States, 35 F.3d 93, 96 (2d Cir. 1994); Robinson 
v. Commissioner, supra at 126; Stocks v. Commissioner, supra 
at 10. The crucial question is “in lieu of what was the 
settlement amount paid?” Bagley v. Commissioner, supra at 
406.

In United States v. Burke, supra, the taxpayers brought a sex 
discrimination claim under title VII against their employer. The 
parties subsequently settled the case, and the employer withheld 
Federal income taxes on the settlement received by the 
taxpayers. The taxpayers sought refunds of the withheld taxes 
on the ground that the settlement was excludable under section 
104(a)(2) as ‘“ damages received * * * on account of personal 
injuries or sickness.’” Id. at 232 (quoting section 104(a)(2)).

The Supreme Court held that the nature of the claim 
underlying the taxpayers’ settlement determined the

1 la

excludability of the settlement under section 104(a)(2). See id. 
at 237. The Court noted that title VII focused on “‘legal injuries 
of an economic character’” and limited the available remedy to 
backpay awards and injunctive relief. Id. at 238-239 (quoting 
Albemarle Paper Co. v. Moody, 422 U.S. 405,418(1975)). The 
Court further stated:

Nothing in this remedial scheme purports to recompense 
a Title VII plaintiff for any of the other traditional harms 
associated with personal injury, such as pain and 
suffering, emotional distress, harm to reputation, or other 
consequential damages * * *.

Id. at 239. Because the taxpayers’ remedies under title VII were 
limited to wages on which they otherwise would have been 
taxed, the Court held that title VII’s sole remedial focus was the 
award of back wages and did not redress a tortlike personal 
injury within the meaning of section 104(a)(2) and the 
applicable regulations. See id. at 241. As such, the settlements 
received by the taxpayers pursuant to their title VII claims were 
not excludable from gross income under section 104(a)(2).

Similar to the taxpayers in United States v. Burke, supra, 
petitioner brought a claim under title VII against her employer. 
Since the damages available to petitioner as a title VII claimant 
consisted only of wages,3 which would otherwise be taxable, 
the $ 150,000 recovery received by petitioner as partial payment

3 In 1991, the Civil Rights Act, Pub. L. 102-166, 105 Stat. 1071 (1991), 
expanded the damages available under title VII and created a right of 
recovery for compensatory and punitive damages for certain intentional 
violations o f title VII. In Landgraf v. US! Film Prods., 511 U.S. 244 (1994), 
the Supreme Court held that the 1991 amendments to the Civil Rights Act 
did not apply retroactively. Because petitioner’s title VII suit was filed in 
1990 and the conduct underlying the suit occurred from 1981 to 1984, the 
application o f sec. 104(a)(2) to any amounts received ffom petitioner’s title 
VII claim must be considered in light o f  the Civil Rights Act as it existed 
prior to the 1991 amendments. See Clark v. Commissioner, T.C. Memo. 
1997-156. In any event, there is no evidence that petitioner sought in her 
Complaint or was awarded damages on account o f personal injury.



of her title VII judgment does not constitute “damages received 
* * * on account of personal injuries”. Thus, under the 
reasoning of Burke, petitioner’s title VII recovery is not 
excludable from gross income under section 104(a)(2).

Petitioner advances several arguments in support of her 
contention that the proceeds received from her title VII claim 
are excludable from income. Petitioner’s first argument draws 
upon the reasoning contained in a dissenting view expressed by 
Justice O ’Connor in United State v. Burke, supra at 249. That 
dissenting view suggests that the focus should be on the broad 
policy underlying title VII rather than the possible remedies 
available to claimants. In the dissent, it was also pointed out 
that title VII actions did not “fix the character of the right” that 
plaintiffs were seeking to enforce. Trying to capitalize on that 
reasoning, petitioner contends that, under the laws of her State, 
her suit was based in common-law torts (assault, battery, sexual 
assault, and sexual battery). Although the form of the title VII 
relief was denominated as “wages”, petitioner argues that, in 
substance, her claim was founded in tort. We note, however, 
that if petitioner had an alternative cause of action under State 
law, she chose not to pursue it and, instead, brought her action 
under title VII.

In order to bolster her substance argument, petitioner cites 
Central Foundry Co. v. Commissioner, 49 T.C. 234, 251 
(1967), and states that the tax treatment of the result of 
litigation should not turn upon which remedy or course of 
action is selected by the taxpayer. Central Foundry Co. 
addressed whether a corporation could deduct the 
reimbursement of shareholders’ expenses from a successful 
proxy fight as ordinary and necessary business expenses. The 
Court stated that no matter which remedy the shareholder 
selected, a derivative action or a proxy contest, it was the 
proximate relationship to the corporation and the benefit to the 
corporation that determined whether the expenses were 
deductible. Central Foundry Co., however, has not been relied 
upon by this Court, or any other court, for guidance in

13a

determining whether recoveries by taxpayers are excludable 
from gross income under section 104(a)(2). Thus, we do not 
view Central Foundry Co. as persuasive support for petitioner’s 
position that the focus should be on the legislative policy 
underlying title VII rather than the possible remedies available 
to claimants.

More important, however, is the fact that the Supreme Court 
did not follow the dissent’s view in Burke and held that a claim 
under title VII is not based on a “tort or tort type” right, taking 
account of the kinds of remedies that may be awarded for that 
claim. United States v. Burke, supra at 234-237. Because pre- 
1991 title VII remedies were limited to backpay and injunctive 
relief, the Court held that a sex discrimination claim did not 
assert a “tort or tort type” right. Regardless of whether 
petitioner s claims may have had an analogue at common law, 
the Supreme Court in Burke looked to the remedy that was 
addressed by title VII.

Petitioner also argues that Burke should be read narrowly to 
apply to cases based on economic acts that result predominately 
in economic harm. Petitioner contends that in cases where 
common law tort remedies exist, Burke should not apply. 
Petitioner, in an attempt to distinguish Burke, points out that the 
taxpayers’ sole claim in that case was for damages based on 
economic rights, whereas petitioner had a tort claim at common 
law. We disagree with petitioner since the majority opinion in 
Burke did not address possibilities outside of title VII.

More importantly, petitioner’s recovery here was based 
entirely on title VII, and no evidence was presented establishing 
that petitioner had any other remedies at common law. Even 
assuming petitioner did have other avenues of relief outside 
title VII, petitioner chose to file a title VII action and is now 
bound by the tax consequences that attach to recoveries under 
title VII. We hold that the proceeds from petitioner’s title VII 
award are not excluded from gross income under 
section 104(a)(2).



14a

Excludability o f Attorney's Fees

The next issue for our consideration is whether petitioner is 
entitled to exclude from her gross income that portion of her 
title VII proceeds paid as attorney’s fees. Petitioner argues that 
if section 104(a)(2) does not apply and her title VII judgment 
proceeds are includable in her 1993 gross income, the 
$73,399.25 paid to her attorneys is excludable from her gross 
income because it was paid directly to her counsel under a 
contingent fee retainer agreement. We note at the outset that 
this Court has, relying on the well-established assignment of 
income doctrine, uniformly rejected the contention that 
taxpayers may exclude the amount of their legal fees and costs 
from gross income. See Kenseth v. Commissioner, 114 T.C.
___  (2000); 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.

Petitioner relies on Cotnam v. Commissioner, 263 F.2d 119 
(5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947 
(1957), arguing that, under the “attorney’s lien” rationale, an 
attorney’s contingent fee portion of a judgment is not included 
in the taxpayer’s income. In Cotnam, the taxpayer and her 
attorneys entered into a contingent fee agreement under which 
the attorneys would receive 40 percent of any amount 
recovered on behalf of the taxpayer on her claim. The taxpayer 
received a judgment on the claim, and a check in the amount of 
the judgment was made payable to both her and her attorneys. 
The attorneys retained their share of the proceeds and remitted 
the rest to the taxpayer. In holding that the amount retained by 
the attorneys was not includable in the taxpayer’s gross income, 
the Court of Appeals for the Fifth Circuit concluded that under 
Alabama State law (the applicable law in Cotnam) the 
contingent fee arrangement operated to assign to the attorneys 
an equitable lien and interest as to 40 percent of the judgment. 
As stated in the provision of the Alabama Code relied upon by 
the Court of Appeals:

15a

2. Upon suits, judgments, and decrees for money, *
* * [attorneys] shall have a lien superior to all liens but 
tax liens, and no person shall be at liberty to satisfy said 
suit, judgment or decree, until the lien or claim of the 
attorney for his fees is fully satisfied; and 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, supra, at 125 n.5 (quoting 46 Ala. 
Code sec. 64 (1940)).

The parties here agree that Missouri law is the applicable 
law in this case. Petitioner argues that the Missouri statute 
regarding attorney liens is similar to that of the Alabama statute 
quoted above, and therefore Cotnam is applicable here. We 
disagree. In the present case, the applicable Missouri statute 
provides as follows:

The compensation of an attorney or counselor for his 
services is governed by agreement, express or implied, 
which is not restrained by law. From the commencement 
of an action or the service of an answer containing a 
counterclaim, the attorney who appears for a party has a 
lien upon his client’s cause of action or counterclaim, 
which attaches to a verdict, report, decision or judgment 
in his client’s favor, and the proceeds thereof in 
whosesoever hands they may come; and cannot be 
affected by any settlement between the parties before or 
after judgment.

Mo. Ann. Stat. sec. 484.130 (West 1987). This provision stands 
in marked contrast to the provision of the Alabama Code relied 
on in Cotnam. Although both provisions give an attorney a lien 
to secure his or her compensation, the Missouri provision, 
unlike the Alabama provision, does not give attorneys the same 
right and power over suits, judgments, and decrees as their 
clients had or may have.



16a

While we agree with petitioner that Missouri law does 
provide attorneys with a lien interest in their client’s cause of 
action, we are unable to find, and petitioner fails to cite, any 
authority under Missouri law that transfers to the attorneys an 
ownership or proprietary interest in their client’s cause of 
action. Rather, the cases that petitioner has cited only allow 
attorneys a lien interest, as opposed to an equity or ownership 
interest, in their client’s cause of action. In Missouri, attorneys 
do not have the same substantive rights in proceeds recovered 
on behalf of their clients as do attorneys in Alabama. See Mills 
v. Metropolitan St. Ry. Co., 221 S.W. 1, 4 (Mo. 1920) (“the 
cause of action is the property of the client and not the 
attorney”).

The Missouri provision granting a lien interest to secure an 
attorney’s compensation is more akin to those attorney lien 
provisions of States that have been distinguished from the 
attorney lien provisions of Alabama. See Baylin v. 
Commissioner, 43 F.3d 1451, 1455 (Fed. Cir. 1995) (holding 
Maryland attorney lien statute does not give attorney an 
ownership interest in claim of his or her client); Estate o f  
Gadlow v. Commissioner, 50 T.C. 975, 979-980 (1968) 
(Pennsylvania law distinguishable from Alabama statute); 
Petersen v. Commissioner, 38 T.C. 137, 151-152 (1962) 
(holding Nebraska attorney lien statute distinguishable from 
Alabama attorney lien statute); Coady v. Commissioner, T.C. 
Memo. 1998-291 (Alaska attorney lien statute distinguishable 
from Alabama statute).

Petitioner next contends that Missouri law provides the same 
attorney lien priority as does Alabama law. In Cotnam, the 
court interpreted Alabama law as providing an attorney lien 
with a superior priority over the defendant’s set-off right 
against the plaintiff. See Cotnam v. Commissioner, supra at 
125. Petitioner relies on Hillside Enters., Inc. v. Carlisle Corp., 
944 F. Supp. 793, 802 (E.D. Mo. 1996), for the proposition that 
Missouri case law has recognized the same superior attorney 
lien priority concept as stated in Cotnam. The District Court’s

17a

decision in Hillside, however, was reversed by the Court of 
Appeals for the Eighth Circuit in Hillside Enters. Inc. v. 
Continental Carlisle, Inc., 147 F.3d 732 (8th Cir. 1998). In 
reversing, the Court of Appeals concluded that the lower 
court’s holding regarding the attorney lien priority was contrary 
to Missouri law and that, under Missouri law, an attorney’s lien 
on the plaintiffs judgment is inferior to the defendant’s right to 
set off its own judgment against the plaintiff. Hillside Enters., 
Inc. v. Continental Carlisle, Inc., 147 F.3d at 735. The fact that 
Missouri law subordinates an attorney’s lien to the rights 
existing between the parties to the action or proceeding clearly 
distinguishes it from the Alabama provision cited in Cotnam 
where the lien of an attorney is “superior to all liens but tax 
liens.” 46 Ala. Code sec. 64 (1940). Based on the foregoing, we 
find petitioner’s case distinguishable from Cotnam and hold 
that petitioner’s gross income includes the $73,399.25 of her 
title VII proceeds paid to her counsel as attorney’s fees.4

Petitioner complains that she is not subject to AMT because 
the attorney’s fees portion of the judgment is not included in 
gross income. We have held that petitioner’s gross income 
includes the portion of her title VII proceeds paid to her counsel 
as attorney’s fees, and therefore petitioner’s argument that she 
is not subject to AMT is rejected.

Petitioner concedes that if the entire $150,000 award is 
included in her gross income, the proper treatment of the 
attorney’s fees is as a miscellaneous itemized deduction as 
reported on petitioner’s 1993 original return. Section 162 (a) 
provides that there “shall be allowed as a deduction all the 
ordinary and necessary expenses paid or incurred during the 
taxable year in carrying on any trade or business”. Legal fees 
incurred by a taxpayer as an expense of employment are

4 We would reach this same holding irrespective o f the differences between 
the Missouri and Alabama attorney lien statutes. See Kenseth v.
Commissioner, 114 T.C. ___(2000) (majority rejected the reasoning of
Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), affg. in part and 
revg. in part 28 T.C. 947 (1957)).



18a

miscellaneous itemized deductions, subject to the overall 
limitation on itemized deductions. See secs. 67 and 68; 
Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995); affg. 
T.C. Memo. 1995-51; Bagley v. Commissioner, 105 T.C. at 
419. Accordingly, petitioner’s legal fees are deductible as a 
miscellaneous itemized deduction.

Petitioner does not dispute respondent’s contention that the 
treatment of the attorney’s fees as a miscellaneous itemized 
deduction triggers the application of the AMT under sections 
55 and 56. Under section 56(b)(l )(A)(i), an individual 
taxpayer’s deduction for miscellaneous itemized deductions is 
not allowed in computing alternative minimum taxable income. 
See Alexander v. Commissioner, supra at 946-947. Therefore, 
petitioner is not permitted to deduct her attorney’s fees as a 
miscellaneous itemized deduction for purposes of computing 
AMT.

To reflect the foregoing,

Decision will be entered for respondent.