Chandler v. Roudebush Brief for Petitioner

    Nos. 03-892, 03-907

In The

Supreme Court of tfje dntteb States!

C o m m issio n e r  o f  In t er n a l  R e v e n u e ,
Petitioner,

v.
J ohn  W. B a n k s , II

Respondent,

C o m m issio n e r  of  In t e r n a l  R e v e n u e ,
Petitioner,

v.
SlGITAS J. BANAITAS

Respondent.

On Writs of Certiorari to the 
United States Courts of Appeals 
for the Sixth and Ninth Circuits

BRIEF OF NATIONAL EMPLOYMENT LAWYERS 
ASSOCIATION, NAACP LEGAL DEFENSE AND 

EDUCATION FUND, INC., AARP, TRIAL LAWYERS 
FOR PUBLIC JUSTICE, PUBLIC ADVOCATES, INC. 

AND THE WESTERN CENTER ON LAW AND 
POVERTY AS AMICI CURIAE IN 

SUPPORT OF RESPONDENTS

Angela  Dalfen 
N ational E mployment 

Lawyers A ssociation 
44 Montgomery Street, Suite 2080 
San Francisco, CA 94104 
(215)296-7629

* Counsel of Record

Douglas b . Huron  * 
Stephen  Z. Chertkof 
Heller , Huron , Chertkof 

Li.RNi R, Simon & Salzman 
1730 M Street, NW, Suite 412 
Washington, DC 20036 
(202)293-8090

Attorneys for Amici Curiae

W ilson-Epes Printing Co., Inc. (202) 789-0096 

60
Washington, D. C. 20001



V ictoria  w . N i 
Trial Law yers for Public 

Justice, P.C.
One Kaiser Plaza, Suite 275 
Oakland, CA 94612

R ichard  A. Marcantonio  
Public Advocates, In c .
131 Steuart Street, Suite 300 
San Francisco, CA 94105
R ichard A. Rothschild 
Western Center  on Law  

and  Poverty 
3701 Wilshire Boulevard,
Suite 208
Los Angeles, California 90010

Theodore M. Shaw  
Director-Counsel 

N orman J. Chachkin  
Robert h . Stroup 
Naacp Legal Defense & 

Educational Fund , In c . 
99 Hudson Street, 16th Floor 
New York, NY 10013
Leslie M. Proll 
NAACP Legal Defense & 

Educational Fund , In c . 
1444 I Street, NW, 10th Floor 
Washington, DC 20005
Thomas W. Osborne 
AARP
601 E Street, NW 
Washington, DC 20049

Co-Counsel for Amici Curiae



TABLE OF CONTENTS

TABLE OF AUTHORITIES..........................................  iii

INTEREST OF AMICI CURIAE....................................  1

STATEMENT.................................................................  2

SUMMARY OF ARGUMENT......................................  3

ARGUMENT.................................................................... 7

I. ATTORNEYS’ FEES RECEIVED BY 
COUNSEL IN STATUTORY FEE CASES 
ARE NOT INCOME TO THE PLAINTIFF....  7

A. The Private Attorney General......................  7

B. The Tax Problem in Statutory Fee Cases....  8

C. The Assignment of Income Doctrine Does
Not Apply to Statutory Fees........................  11

1. The Assignment of Income Doctrine.....  11

2. The Inapplicability of the Doctrine to
Statutory Fees.........................................  12

D. Porter v. A ID ................................................  14

E. The Effect of Statutory Fee Shifting on
Banks.............................................................  17

II. ORDINARY CONTINGENT FEES ARE
NOT INCOME TO THE PLAINTIFF.............. 19

A. The Split in the Circuits................................ 20

B. The Dispositive Nature of the Joint Ven­
ture Analogy...........................    21

1. Kenseth.................................................... 22

2. The Economic Realities.........................  23

Page

(0



TABLE OF CONTENTS-Continued

Page

3. The Contingent Fee Lawyer as Joint
Venturer................................................... 25

CONCLUSION................................................................ 27

APPENDIX......................................................................  la



Ill

Arneson v. Sullivan, 958 F. Supp. 443 (E.I). Mo.
1996)..................................................................... 16

Banaitis v. Commissioner, 340 F.3d 1074 (9th
Cir. 2003)...................................................2 .3 .7 . 20.21

Banks v. Commissioner. 345 F.3d 373 (6th Cir.
2003)......................................................................passim

Bari in v. United States, A3 F.3d 1451 (Fed. Cir.
1995)..................................................................... 20

Benci-Woodward v. Commissioner. 219 F.3d 941 
(9th Cir. 2000). cert, denied, 531 U.S. 1112
(2001) ....................................................................................  21

Biehl v. Commissioner, 351 F.3d 982 (9th Cir.
2003)....................................................................  9

Blanchard v. Bergeron. 489 U.S. 87 (1989)......... 4. 5, 13
Blum v. Slenson, 465 U.S. 886 (1984)........ 4. 5. 8, 12. 13
Burlington Industries. Inc. v. Ellerth. 524 U.S.

742 (1998)............................................................  18
City o f  Riverside v. Rivera. 477 U.S. 561 (1986).. 4. 10
Estate o f Clarks v. United States, 202 F.3d 854

(6th Cir. 2000)..................................................... 20
Coady v. Commissioner, 213 F.3d 1187 (9th Cir.

2000) , cert, denied. 532 U.S. 972 (2001).........  21
Cotnam v. Commissioner, 263 F.2d 119 (5th Cir.

1959)..................................................................... 3
Dashnaw v. Pena. 12 F.3d 1112 (D.C. Cir. 1994).. 16
Davis v. Commissioner. 210 F.3d 1346 (11th Cir.

2000)....................................................................  20
EEOC v. Joe's Stone Crab. Inc., 15 F. Supp. 2d

1368 (S.D. Fla. 1998).........................................  16
EEOC v. Shell Oil Co.. 466 U.S. 54 (1984).........  5.18
Evans v. JeffD ., 475 U.S. 717 (1986)...................  14
Foster v. United States, 249 F.3d 1275 (11th Cir.

2001)  .......................................................................................................  20

TABLE OF AUTHORITIES

FEDERAL CASES Page



IV

Griggs v. Duke Power Co., 401 U.S. 424 (1971).. 10
Helvering v. Horst, 311 U.S. 112 (1940)...3. 5, 12. 14, 24
Hensley v. Eckerhart, 461 U.S. 424 (1983)............  13
Hukkanen-Campbell v. Commissioner, 274 F.3d 

1312 (10th Cir. 2001), cert, denied, 535 U.S.
1056(2002)..........................................................  20,22

Jordan v. CCH, Inc., 230 F. Supp. 2d 603 (E.D.
Pa. 2002).......................................................   15

Kay v. Ehrler, 499 U.S. 432 (1991)......................... 5,14
Kenseth v. Commissioner, 259 F.3d 881 (7th Cir.

2001)....................................................20, 22. 23. 24. 26
Lucas v. Earl, 281 U.S. 111 (1930).................3, 5, 12, 24
Mapp v. Ohio, 367 U.S. 643 (1961)......................  19
Newman v. Piggie Park Enterprises, Inc., 390

U.S. 400(1968)...................................................  1 .3 ,8
O'Neill v. Sears Roebuck & Co., 108 F. Supp. 2d

443 (E.D. Pa. 2000)............................................. 15
Porter v. Director, Agency for International 

Development, 293 F. Supp. 2d 152 (D.D.C.
2003) ..................................................................  4

Raymond v. United States, 355 F.3d 107 (2d Cir.
2004) ..................................................................  20

Sears v. Atchison, Topeka & Santa Fe Railway
Co., 749 F.2d 1451 (10th Cir. 1984)...............’.. 15

Sinyard v. Commissioner, 268 F.3d 756 (9th Cir.
2001), cert, denied, 538 U.S. 904 (2002)...........  12

Srivastava v. Commissioner, 220 F.3d 353 (5th
Cir. 2000).............................................................  20

Teague v. Lane, 489 U.S. 288 (1989)....................  6, 19
Venegas v. Mitchell, 495 U.S. 82 (1990)...4, 5, 7, 8. 11, 13 
White v. New Hampshire Department o f  Employ­

ment Security, 455 U.S. 445 (1982).....................  9
Young v. Commissioner, 240 F.3d 369 (4th Cir.

2001)..................................................................... 20

TABLE OF AUTHORITIES—Continued
Page



TABLE OF AUTHORITIES—Continued 
STATE CASE Page

Blaney v. 1AM, 87 P.3d 757 (S.Ct. Wash. 2004)... 16

FEDERAL STATUTES
26 U.S.C. § 104(a)(2)............................................  18
26 U.S.C. § 55(b)( 1 )(A)(i)..................................... 10
26 U.S.C. § 56(b)(l)(A)(i)..................................... 10
26 U.S.C. § 61 (a)( 13)..................................... 6. 21.24. 25
26 U.S.C. § 62(a)(2)(A)......................................... 9
26 U.S.C. § 67 ....................................................... 9
26 U.S.C. §68 ........................................................  9
26 U.S.C. § 104(a)(2)............................................  2
26 U.S.C. § 702 ...................................................... 21
26 U.S.C. § 761(a)................................................6 .21.24
29 U.S.C. § 216(b).................................................  22
29 U.S.C. § 626(b).................................................  22
42 U.S.C. § 1981 .....................................................1.2. 17
42 U.S.C. § 1981 a(b)(3).........................................  10.11
42 U.S.C. § 1983.....................................................1. 2. 17
42 U.S.C. § 2000a-3(b)..........................................  7
42 U.S.C. § 2000e-5(k)........................................... 2. 7. 17
42 U.S.C. § 1988 ................................................ 2. 7. 8. 17

FEDERAL REGULATION
26 C.F.R. § 1.62-2(c)(4) (2004).............................  9

MISCELLANEOUS

Adam Liptak. "Tax Bill Exceeds Award to 
Officer in Sex Bias Case.” New York Times
(August 11.2002).......................................   10

Richard Posner. Economic Analysis o f Law
(5th ed. 1998)..................................................... 6 .23,26

Laura Sager and Stephen Cohen, "How the 
Income Tax Undermines Civil Rights Law. " 73 
S. Cal. L. Rev. 1075 ...........................................  9.10



INTEREST OF AMICI CURIAE1

All amici here, either organizationally or through their 
members, represent individuals under Federal fee shifting 
statutes, including Title VII of the Civil Rights Act of 1964. 
the Equal Pay Act, 42 U.S.C. §§ 1981 and 1983. the Age 
Discrimination in Employment Act. the Rehabilitation Act 
of 1973. the Americans with Disabilities Act and the Family 
and Medical Leave Act. The payment of attorneys' fees in 
such litigation is contingent in the sense that the defendant 
only pays fees if the plaintiff prevails, but the fee award is 
separate from judgment on the merits. This is unlike the 
situation in “ordinary” contingent fee cases, where fees are 
apportioned from the merits judgment, with lawyer and client 
each taking a share.

In fee shifting cases under civil rights statutes, the relief 
sought may be exclusively, or predominantly, injunctive. 
Indeed, the only money awarded in some cases may be the 
attorneys' fees themselves. If the plaintiffs in these or similar 
cases are required to pay taxes on fees that go to their 
lawyers, they will lose money by winning a lawsuit. Even the 
most meritorious civil rights claims will not be pursued, and 
the fundamental goal of fee shifting—encouraging citizens to 
act “as a "private attorney general,' vindicating a policy that 
Congress considered of the highest priority,” Newman v. 
Piggie Park Enterprises, Inc., 390 U.S. 400, 402 (1968)— 
will be nullified. All amici share an interest in seeing that this 
does not occur.

1 The parties have consented to the filing of this brief, and their letters 
of consent are on file with the Clerk. Counsel for amici curiae certify that 
this brief was not written, in whole or part, by counsel for a party, and that 
no person or entity, other than amici curiae and counsel, made a monetary 
contribution to the preparation or submission of the brief. Supreme Court 
Rule 37.6.



Amici also have an interest in the plaintiffs tax liability for 
fees received by lawyers under ordinary contingent fee agree­
ments, because such agreements may provide the only vehicle 
for financing litigation on behalf of impecunious individuals, 
especially if fee shifting statutes are not available. Fuller 
statements of interest for all amici are included in the appen­
dix to this brief.

STATEMENT

These consolidated cases both involve the tax treatment 
of fees paid to plaintiff s counsel in employment litigation 
undertaken under a contingent fee agreement. Contrary to 
the Solicitor General’s assumption, however, there are 
significant differences between the two cases, requiring 
different modes of analysis.“

In No. 03-892, respondent Banks originally sued his 
employer under both Federal and state law. But by the time 
the case settled for $464,000 ($150,000 of which went to 
counsel), only the three Federal claims remained viable, 
arising under Title VII and 42 U.S.C. §§ 1981, 1983. Banks 
v. Commissioner, 345 F.3d 373, 379 (6th Cir. 2003). All three 
of these claims were subject to statutory fee shifting. See 
42 U.S.C. § 2000e-5(k) (Title VII). and̂  42 U.S.C. § 1988 
(§§ 1981, 1983).

In No. 03-907, in contrast, respondent Banaitis pursued 
two common law Oregon tort claims. Banaitis v. Commis­
sioner, 340 F'.3d 1074, 1077 (9th Cir. 2003). Such claims 
were not subject to fee shifting. The case ultimately settled 
for $8,728,559, of which $3,864,012 was paid to counsel. 
Id. at 1078.

‘ As the Solicitor General notes, Brief for Petitioner at 15 n.3, neither 
case involves recoveries for “personal physical injuries or physical 
sickness,” which are excluded from gross income under 26 U.S.C. § 
104(a)(2).



Both the Sixth Circuit in Banks and the Ninth in Banaitis 
held that the fees received by counsel should not be treated as 
income to the plaintiff. Consequently, those fees were subject 
to taxation only as income to the lawyers. The two courts 
employed different rationales. The Ninth Circuit viewed state 
lien law as dispositive, as in Cotnam v. Commissioner. 263
F.2d 119 (5th Cir. 1959), and stressed that Oregon law was 
comparable to that in Alabama (as analyzed in Cotnam) in 
granting superior rights to lawyers. 340 F.3d at 1082-83. 1 he 
Sixth Circuit rejected a “state-by-state” approach, instead 
likening Banks' lawyer to a “tenant in common of the orchard 
owner [who] must cultivate and care for and harvest the fruit 
of the entire tract.” 345 F.3d at 384-85. The Sixth Circuit did 
not focus on the fee shifting statutes under which Banks' 
claims arose.

SUMMARY OF ARGUMENT

In both these cases, the taxpayer derived income from 
settlement of a lawsuit against his employer, and in both 
cases the underlying litigation featured a contingent tee 
agreement between the taxpayer and counsel. In Banks, 
however—unlike Banaitis—the settled claims arose under 
Federal fee shifting statutes. This distinction is crucial.

1. Whatever the proper result in ordinary contingent 
fee litigation, fees awarded by a court under a tee shifting 
statute (or paid as part of a settlement) are not income to the 
plaintiff. The “assignment of income” doctrine, developed in 
cases like Lucas v. Earl, 281 U.S. 111 (1930), and Helvering 
v. Horst, 311 U.S. 112 (1940), simply has no application to 
the statutory fee model, because statutory fees are not intend­
ed to liquidate a private debt owed by a plaintiff to counsel.

This Court has explained that a private plaintiff in a civil 
rights case acts “as a ‘private attorney general," vindicating a 
policy that Congress considered of the highest priority.” 
Newman v. Biggie Park Enterprises, Inc., 390 U.S. at 402.



4
Resources are required for successful prosecutions by any 
attorney general, public or private, and Congress “enacted the 
provision for counsel fees . . .  to encourage individuals 
injured by racial discrimination to seek judicial relief.” Id. 
The “aim” of fee shifting is to encourage meritorious liti­
gation by “enabling] civil rights plaintiffs to employ 
reasonably competent lawyers without cost to themselves if 
they prevail.” Venegas v. Mitchell. 495 U.S. 82, 86 (1990).

A statutory fee case, unlike ordinary contingent fee 
litigation, entails two distinct awards, separated temporally:
(1) judgment on the merits, which may be declaratory or 
injunctive relief or damages from a jury, followed by
(2) attorneys’ fees awarded by the court. Judicial awards 
at "stage 2” are divorced from any private agreements 
between plaintiff and counsel, Blanchard v. Bergeron, 489 
U.S. 87, 93 (1989), and are intended to produce “fees which 
are adequate to attract competent counsel, but which do not 
produce windfalls to attorneys.” Blum v. Stenson, 465 U.S. 
886. 893-94 (1984).

The difference between statutory fees and ordinary 
contingent fees is perhaps best illustrated by the eligibility of 
pro hono legal organizations for statutory fees at normal 
market rates, even though the plaintiff owes them nothing. 
Id. at 894. This makes it clear that statutory fees are not 
intended to discharge private obligations.

Statutory fees and ordinary contingent fees also differ in 
another crucial respect. Unlike ordinary contingent fees, 
which are some percentage of the merits recovery, it is not 
unusual for a statutory fee award to be larger than the merits 
judgment. City o f Riverside v. Rivera. 477 U.S. 561 (1986). 
In such cases, if attorneys’ fees are considered income to the 
plaintiff, the operation of the Alternative Minimum Tax will 
frequently result in a prevailing plaintiffs suffering a net 
financial loss. See, e.g., Porter v. Director, Agency for  
International Development, 293 F.Supp.2d 152 (D.D.C.



2003) (plaintiff who won a jury verdict of $30,000 plus a tee 
award could suffer a post-tax loss of nearly $50,000). The 
plaintiff in the worst posture is the one who seeks, and 
secures, purely injunctive relief; she receives no money 
herself but pays taxes on every dollar that her lawyer is 
awarded in fees.

A key objective of fee shifting, however, is to permit 
plaintiffs “to employ . . . lawyers without cost to themselves it 
they prevail.’' Venegas v. Mitchell, 495 U.S. at 86 (emphasis 
added). Including statutory fees in the plaintiffs income 
undermines this congressional goal and is not required by 
unyielding tax principles. The evils addressed by Lucas v. 
Earl and Helvering v. Horst are simply not present in the fee 
shifting context. In particular, this is not a situation in which 
a plaintiff is assigning his own income to counsel. On the 
contrary, the plaintiff himself has no statutory right to the fee 
award, even if he is a lawyer, since judicially ordered tees are 
intended only for retained counsel. Kay v. Ehrler. 499 U.S. 
432 (1991). Nor is it a case of the defendant paying a private 
debt owed by plaintiff to counsel, since statutory fees are 
independent of private fee agreements. Blum v. Stenson, 
supra; Blanchard v. Bergeron, supra. Finally, this is not a 
situation in which an amount will go untaxed unless deemed 
income to the plaintiff. An award of attorneys’ tees is without 
question income to counsel, and counsel pays taxes on it.

The taxpayer's employment claims in Banks arose under 
fee shifting statutes, but there was no judicial award of fees 
because the case settled. Had Banks gone to trial and 
recovered the same amounts—$314,000 from a jury verdict, 
followed by a fee award of $150.000—the fees would not 
properly be seen as income to him. The tax treatment should 
not be affected by the fortuity that these sums were recovered 
through settlement. See EEOC v. Shell Oil Co.. 466 U.S. 54. 
77 (1984). Otherwise, plaintiffs in fee shifting cases would



be compelled to litigate, rather than settle, simply to enjoy 
favorable tax treatment.

A judicial award of attorneys’ fees under a fee shifting 
statute is not income to the plaintiff, and fees recovered 
through settlement should be treated the same way. The 
judgment of the court of appeals in Banks can be affirmed 
on this ground alone. Amici recognize that the issue of the 
proper tax treatment of statutory fees was not presented to the 
Court by the parties, but the Court may consider arguments 
only put forward by an amicus, Teague v. Lane, 489 U.S. 
288, 300 (1989), and amici request that the Court consider 
doing so here.

2. In addition, and in the alternative, fees received by 
counsel in ordinary contingent fee cases should not be 
deemed the plaintiffs income, either. A lawyer retained on a 
contingent basis is in the same economic position as a joint 
venturer, “in effect a cotenant of the property represented by 
the plaintiff's claim.” Richard Posner, Economic Analysis o f 
Law (5th ed. 1998) at 625. See Banks, 345 F.3d at 384-85. A 
joint venture is a “partnership” under the Tax Code, 26 
U.S.C. § 761(a), and partners are taxed only on their 
respective “share of partnership gross income.” 26 U.S.C. 
§ 61 (a)( 13).

Unlike a commissioned salesperson, a lawyer paid on a 
contingent fee basis— if successful—significantly enhances 
the value of the underlying property (i.e., the plaintiffs 
claim). And unlike counsel paid on an hourly basis, a 
contingent fee lawyer assumes the risk that the venture may 
not succeed.

In short, a successful lawyer operating under a contingent 
fee agreement both enhances the value of property and 
assumes the risk that the property may not be profitable. In 
these respects, the lawyer is in the same economic position as 
the owner of the property, whether or not a formal co-tenancy 
relationship exists. Tax law should recognize this economic

6



7
reality and treat a contingent fee arrangement as a joint 
venture, in which the parties are taxed only on their 
respective shares of gross income. Both Banaitis and Banks 
can be affirmed on this basis.

ARGUMENT

I. ATTORNEYS’ FEES RECEIVED BY COUNSEL 
IN STATUTORY FEE CASES ARE NOT IN­
COME TO THE PLAINTIFF

An ordinary contingent fee case is “contingent" because 
counsel is compensated only if the plaintiff prevails following 
trial or if the case settles; the lawyer takes a percentage of 
the jury award (or settlement). The archetypal case under a 
fee shifting statute is also contingent in the sense that counsel 
is not compensated unless the plaintiff prevails. But counsel's 
fee does not come from the plaintiffs recovery; rather, 
responsibility for payment of the lee is “shifted” to the defen­
dant, and the amount is determined by the court in a separate 
proceeding after the plaintiff has prevailed on the merits.

A. The Private Attorney General
Statutory fee shifting is a relatively recent phenomenon. 

The first modern fee shifting provisions were contained 
in Titles II and VII of the Civil Rights Act of 1964. See 
42 U.S.C. § 2000a-3(b) (Title II). 42 U.S.C. § 2000e-5(k) 
(Title VII). Twelve years later, the Civil Rights Attorney's 
Fees Awards Act of 1976, 42 U.S.C. § 1988. broadened the 
sweep of statutory fee shifting to embrace a host of other civil 
rights law:s.

This Court has said that the “aim” of the fee shifting 
provisions in Title VII and other statutes, such as 42 U.S.C. 
§ 1988. is to encourage meritorious litigation by “enabl[ing] 
civil rights plaintiffs to employ reasonably competent lawyers 
without cost to themselves if they prevail.” Venegas v. 
Mitchell 495 U.S. at 86. In the first case construing the fee



provisions in the Civil Rights Act of 1964, the Court ex­
plained that a private plaintiff in a civil rights case acts “as a 
•private attorney general.' vindicating a policy that Congress 
considered of the highest priority.” Newman v. Piggie Park 
Enterprises, Inc., 390 U.S. at 402. Fee shifting is essential to 
this enterprise because.

[ijf successful plaintiffs were routinely forced to bear 
their own attorneys’ fees, few aggrieved parties would 
be in a position to advance the public interest. . . . 
Congress therefore enacted the provision for counsel 
fees—not simply to penalize litigants . . . but, more 
broadly, to encourage individuals injured by racial 
discrimination to seek judicial relief. . . .

Id.

The Court has also construed 42 U.S.C. § 1988 in a number 
of cases and has said that “[tjhe standards set forth [under 
§ 1988] are generally applicable in all cases in which 
Congress has authorized an award of fees to a 'prevailing 
party.’ ” Hensley r’. Eckerhart, 461 U.S. 424, 433 n.7 (1983). 
And the objective of § 1988 (and hence of any fee shifting 
statute) is to produce “fees which are adequate to attract 
competent counsel, but which do not produce windfalls to 
attorneys.” Blum v. Stenson, 465 U.S. at 893-94. In 
particular, statutory fees are not intended to liquidate any 
private debt that the plaintiff may owe counsel. Venegas v. 
Mitchell, 495 U.S. at 90 (Ҥ 1988 controls what the losing 
defendant must pay, not what the prevailing plaintiff must 
pay his lawyer”).

B. The Tax Problem in Statutory Fee Cases

In fee shifting cases, the trial is concerned solely with the 
merits. If the plaintiff wins, due either to a jury verdict or 
a bench ruling, the district court later considers an application 
for attorneys’ fees from plaintiffs counsel. In fact, the 
judgment on fees is so divorced from the merits—so



9
“ancillary”—that the absence of a decision on fees does not 
deprive the underlying merits judgment of finality for 
purposes of appeal. See White v. New Hampshire Dept, of 
Employment Security, 455 U.S. 445 (1982).

There is no dispute that an award of statutory attorneys' 
fees is income to counsel and should be taxed accordingly. 
The Internal Revenue Service, however, views cases involv­
ing statutory fees in the same way it sees ordinary contingent 
fee cases, taking the position that all money paid by the 
defendant in a statutory fee case, including the fees them­
selves, is also income to the plaintiff. Hence the same fees 
are taxed as income to both plaintiff and counsel.

If fees were deductible in full for Federal income tax 
purposes, their treatment as income would be a moot point. 
But they are not. The IRS has successfully argued that fees 
should be treated as “miscellaneous itemized deductions,” see 
Biehl v. Commissioner. 351 F.3d 982 (9th Cir. 2003), and 
under the regular income tax, such deductions are deductible 
only to the extent that their total exceeds two percent of 
adjusted gross income. 26 U.S.C. § 67. In addition, the 
regular income tax imposes a ceiling on miscellaneous 
itemized deductions. 26 U.S.C. § 68. Together, these two 
provisions serve to increase the nominal marginal tax rate by 
five percent (e.g., a marginal rate of 39.6 percent effectively 
becomes 41.58 percent). See Laura Sager & Stephen Cohen, 
“How the Income Tax Undermines Civil Rights Law,” 73 S. 
Cal. L. Rev. 1075. 1084-85 and n.52 (2000).3

3 Professor Cohen has filed an amicus brief here as an academic pro se, 
arguing that attorneys’ fees should be considered unreimbursed employee 
business expenses under 26 U.S.C. § 62(a)(2)(A). rather than miscel­
laneous itemized deductions. Given this characterization, fees would be 
excluded from gross income under 26 C.F.R. § 1.62-2(c)(4) (2004). 
Professor Cohen proposes a simple and elegant solution to the prob­
lems associated with the taxation of attorneys’ fees, and amici endorse 
his approach.



10
Even more egregious, the Alternative Minimum Tax 

(AMT), which taxpayers must compute and pay if it yields 
a higher tax levy than the regular income tax, does not allow 
any miscellaneous itemized deductions at all. 26 U.S.C. 
.§ 56(b)(l)(A)(i). That means that those prevailing plaintiffs 
who are subject to the AMT wall owe taxes equal to either 26 
or 28 percent of the court-ordered fee award. 26 U.S.C. 
§ 55(b)(l)(A)(i). At a minimum, this will sharply cut into the 
recovery on the merits (which is also subject to taxation). See 
Sager & Cohen, supra, at 1077-78.

In ordinary contingent fee litigation, the fee can never 
be larger than the merits recovery, since counsel’s fee is 
computed as a percentage of that amount. But in statutory 
fee cases, it is not unusual for a fee award to be larger than 
the merits judgment. City o f  Riverside v. Rivera. 477 U.S. 
561.4 And in cases where the amount of attorneys’ fees 
exceeds the plaintiffs recovery, the taxes due on fees 
frequently will result in a net financial loss for the plaintiff. 
See Adam Liptak. “Tax Bill Exceeds Aw-ard to Officer in 
Sex Bias Case,” New York Times (August 11, 2002) at A12 
(recounting how a prevailing plaintiff, whose jury verdict 
of $3 million had been reduced to $300,000 and whose 
lawyers were awarded fees of $850,000, faced a net post-tax 
loss of $99,000).

In such cases, the plaintiff is financially worse off prevail­
ing than losing. This is also true in cases where injunctive 
relief is the primary, or sole, remedy sought, as in a suit 
brought to enjoin use of selection devices that are not job-related 
but that fall more harshly on African Americans than on whites. 
See Griggs v. Duke Power Co.. 401 U.S. 424 (1971). In similar

4 The phenomenon of attorneys’ fees exceeding the merits recovery is 
especially likely under Title VII and the Americans with Disabilities Act, 
where damages are capped at $300,000 for even the largest employers 
under 42 U.S.C. § 1981 a(b)(3). so larger jury verdicts are routinely 
reduced to $300,000.



fashion, there may be no pay loss in a case of sexual 
harassment, and the victimized woman may simply want 
the security of a judicial prohibition. And even if she also 
seeks damages, an injunction may still be the most potent 
remedy available against small employers (100 or fewer 
employees), where the damage ceiling is $50,000. 42 U.S.C. 
§ 1981 a(b)(3). Treating the fees awarded counsel as income 
to the plaintiff in such cases, and taxing the plaintiff on that 
sum, eviscerates the congressional objective of permitting 
plaintiffs ‘To employ . . . lawyers without cost to themselves 
if they prevail.” Venegas v. Mitchell, 495 U.S. at 86. Indeed, 
such tax treatment would deter citizens from pursuing even 
the most meritorious civil rights claims.

C. The Assignment of Income Doctrine Does Not
Apply to Statutory Fees

At the outset of his Summary of Argument, the Solicitor 
General makes a number of points that he believes apply to 
the ordinary contingent fee setting, but none of them are 
pertinent to statutory fees. For example, the Solicitor General 
says that “income is to be taxed to the person who earns it. 
even when it is paid at that person's direction to someone 
else,” Brief for Petitioner at 11; that “when a debt owed by a 
taxpayer is satisfied by a direct payment from a third party to 
the taxpayer’s creditor, the taxpayer receives ‘income’ in the 
amount of the discharged debt,” id.; and that where a taxpayer 
“has ‘diverged] the payment from himself to others as the 
means of procuring the satisfaction of his wants,' [he] is 
subject to tax on the diverted proceeds,” id. Amici do not 
quarrel with these tenets, but they do not apply to judicial 
awards under a fee shifting statute.

1. The Assignment of Income Doctrine

The principles cited by the Solicitor General represent 
differing formulations of the anticipatory assignment of 
income doctrine, which the Court developed in the first



12
generation following the adoption of the Federal income tax 
to prevent taxpayers from escaping taxation through shell 
games. For example, in Lucas v. Earl. 281 U.S. 111 (1930). 
the Court declined to bless a scheme in which a taxpayer 
assigned 50 percent of his future salary to his wife in an effort 
to avoid paying taxes on the entire amount. Id. at 115 
(rejecting an “arrangement by which the fruits are attributed 
to a different tree from that on which they grew”).

Similarly, in Helvering v. Horst. 31 1 U.S. 112 (1940), the 
Court held that the taxpayer was liable for taxes due on 
interest from bonds that he held, even though he had clipped 
the interest coupons and given them to his son shortly before 
the maturity date. And in Horst, the Court noted that it had 
previously ruled, in another variation on the assignment of 
income theme, that “[i]f the taxpayer procures payment 
directly to his creditors of the items of interest or earnings 
due him * * * he does not escape taxation because he did not 
actually receive the money.” Id. at 116. That is, “[i]f A owes 
B a debt, and C pays the debt on A's behalf, it is elementary 
that C's payment is income to A as well as to B.” Sinyard v. 
Commissioner, 268 F.3d 756, 758 (9th Cir. 2001), cert, 
denied. 538 U.S. 904 (2002).

2. The Inapplicability o f the Doctrine to Stat­
utory Fees

The principles first enunciated in Lucas v. Earl and 
Helvering v. Horst do not apply to the statutory fee context. 
A defendant who pays a court-ordered fee aw^ard, for 
example, is not discharging a private debt owed by the 
plaintiff to counsel, since fees awarded by a court are 
divorced from any private understanding between plaintiff 
and her lawyer. Thus, even nonprofit organizations that 
provide legal services pro bono are entitled to fees if the 
plaintiff prevails. Blum v. Stenson. supra (Legal Aid Society 
of New York City entitled to fees).



13
In addition, the amount of the fee award has nothing to do 

with whatever private agreement plaintiff and counsel may 
(or may not) have. See Blanchard v. Bergeron, 489 U.S. at 
93 (“[sjhould a [private] fee agreement provide less than a 
reasonable fee . . . the defendant should nevertheless be 
required to pay the higher amount. The defendant is not, 
however, required to pay the amount called for in a 
contingent-fee contract if it is more than a reasonable fee"'); 
Venegas v. Mitchell, 495 U.S. at 90 (Ҥ 1988 controls what 
the losing defendant must pay, not what the prevailing 
plaintiff must pay his lawyer”).

Rather than depending on a private arrangement, the tee 
award should be a sum “adequate to attract competent 
counsel, but which do[es] not produce windfalls to attorneys.” 
Blum v. Stenson, 465 U.S. at 893-94. In practice, this means 
that the award should be calibrated to reflect the lawyer’s 
effort; i.e.. “[t]he most useful starting point for determining 
the amount of a reasonable fee is the number of hours 
reasonably expended on the litigation multiplied by a 
reasonable hourly rate.” Hensley v. Eckerhart, 461 U.S. at 
433. The Solicitor General says that the “ ‘source of the 
income’ at issue” is a salient factor in determining who 
should be taxed, Brief for Petitioner at 12 (quoting Horst. 311 
U.S. at 116), and Hensley makes it clear that the “source” of 
the fee award—in particular, its amount— is the lawyer's 
effort, not the plaintiffs.

In a statutory fee case, unlike ordinary contingent fee 
litigation, two distinct sums are generated. The first is the 
judgment on the merits. Then, in a separate proceeding, 
attorneys’ fees are awarded by the court. Unlike ordinary 
contingent fee litigation, the plaintiff s lawyer has no claim 
under fee shifting law's to any portion of the judgment on the 
merits. By the same token, Congress did not envision that the 
plaintiff herself would retain the attorneys’ fees awarded in 
the separate fee proceeding.



14
The difference between private contingent fee arrange­

ments and statutory fee shifting is highlighted in pro se cases, 
where retained lawyers are absent. If the plaintiff in a 
common law tort action decides to represent herself rather 
than retain counsel on a contingent basis, and if she then 
prevails on the merits, she gets to keep the entire judgment, 
including the portion that might otherwise have gone to a 
lawyer. But in a case subject to a fee shifting law, a pro se 
plaintiff who prevails is entitled only to the merits judgment 
and is never eligible for a separate fee award. This is true 
even if the pro se plaintiff is a lawyer, since fees are awarded 
only to further the congressional goal of attracting retained 
counsel. Kay v. Ehrler, 499 U.S. 432.

This is not to suggest that lawyers have a property interest 
in fees under lee shifting laws. They do not. Hence the 
plaintiff in a statutory fee lawsuit (as in any other case) has 
the final say on all substantive matters. This is why the 
plaintiff (in the absence of a private agreement with counsel) 
is free to bargain away fees in exchange for greater relief on 
the merits. See, e.g., Evans v. Jeff 1).. 475 U.S. 717, 731-32 
(1986). Jeff D.. however, deals with control of the litigation. 
If fees are ultimately awarded, however, they go to counsel; 
the plaintiff has no statutory claim on the money. Kay v. 
Ehrler, supra.

In Helvering v. Horst, the Court said that “[cjommon 
understanding and experience are the touchstones for the 
interpretation of the revenue laws.” 311 U.S. at 118. This 
sentiment may have been aspirational, but on any “common 
understanding,” the plaintiff in a statutory fee case does not 
receive income through court-ordered fees.

D. Porter v. AID

Amici believe that only one court has squarely address­
ed the issue of the taxability of an award of attorneys’ fees 
in the statutory fee context. In Porter v. Director, Agency



15
for International Development, 293 F.Supp.2d 152, the 
jury found that the plaintiff had twice been denied promotions 
because of retaliation in violation of Title VII, and awarded 
a total of $30,000 in damages. In a separate proceeding, 
the district court later awarded $253,987 in attorneys’ 
fees. See No. 00-1954 (D.D.C.), Docket Entry No. 155 
(December 12, 2003).

If the IRS’ position prevails and both the damages and fees 
awarded in Porter are seen as income to the plaintiff, he 
would in all likelihood be subject to the Alternative Minimum 
Tax. And since the IRS views fees as “miscellaneous 
itemized deductions” which are not deductible under the 
AMT (and since the AMT has only two brackets—26 and 28 
percent), the plaintiff will owe either 26 or 28 percent of 
$283,987 (the total of $253,987 in fees and $30,000 in 
damages). That is, he will owe either $73,837 (at 26 percent) 
or $79,516 (at 28 percent). But the plaintiff did not receive 
any of the fee award; his counsel did. The plaintiff received 
only $30,000 in damages, so his net loss will be $43,837 or 
$49,516. He would have been much better off financially if 
he had lost on the merits at trial. Such pyrrhic victories will 
frustrate the congressional goal of encouraging private 
citizens to vindicate civil rights.

The district court in Porter was plainly troubled by this 
prospect. And given Title VII’s “make whole” imperative, the 
court was confident that it possessed authority— il 
necessary—to order that the fee award be "grossed up ’ to 
ameliorate any adverse tax consequences. 293 F.Supp.2d at 
156.5 The district court declined to order grossing up,

5 Other courts have agreed that they have authority under anti- 
discrimination statutes to enhance awards to mitigate adverse tax 
consequences. See, e.g., Sears v. Atchison, Topeka <fe Santa Fe Ry. Co., 
749 F.2d 1451, 1456 ( 10th Cir. 1984) (Title VII); Jordan v. CCH, Inc., 230 
F.Supp.2d 603, 617 (E.D. Pa. 2002) (Age Discrimination in Employment 
Act); O'Neill v. Sears Roebuck & Co., 108 F.Supp.2d 443, 446-47 (E.D.



16
however, due to considerations of finality and also because of 
a belief that—in the end—the award of attorneys’ fees would 
not be deemed income to the plaintiff. Id. Instead, the court 
“concluded that the best course is to do what [it] can to ensure 
that the attorneys' fee award never becomes a tax problem for 
Porter, by . . . explaining the nature of the award clearly, so 
that Porter or his tax adviser can refer to the explanation 
when preparing income tax returns, and so that the IRS can 
consider the explanation before attempting to impose a tax on 
Porter for the attorney’s fee award.” Id. at 157.

In its “explanation” for the IRS, the district court said that 
“[t]he plaintiff s attorney in a Title VII case performs a public 
interest role,” and that Congress authorized fee shifting 
“because it recognized that incentives would be needed to 
bring lawyers into a controversial field, where recoveries 
might not otherwise warrant substantial fees, in order to 
vindicate newly enacted civil rights.” Id. The court further 
explained that “[a]n award of attorneys’ fees in a Title VII 
case is not a percentage, or a subset, or in any way a part of 
an award of compensatory damages or of an award of back 
pay, front pay, or pre-judgment interest given as equitable 
relief.” Id. Rather, “[ijt is a separate award, separately 
provided by statute, and made by the court in a separate 
proceeding.” Id.

For these reasons, “[t]he ownership issue that appears to 
have split the circuits on the taxability of contingent fees . . . 
is not germane to a statutory Title VII attorneys’ fee, and 
neither is the assignment of income doctrine.” Id. at 158. 
That is, “the form of an attorneys’ fee award is that of an

Pa. 2000) (ADEA); EEOC v. Joe's Stone Crab, Inc., 15 F.Supp.2d 1368, 
1380 (S.D. Fla. 1998) (Title Vli); Arneson v. Sullivan. 958 F.Supp. 443, 
447 (E.D. Mo. 1996) (Rehabilitation Act). See also Blaney v. 1AM, 
87 P.3d 757, 761-64 (S.Ct. Wash. 2004) (Washington Law Against 
Discrimination). But see Dashnaw v. Pena, 12 F.3d 1112 (D.C. 
Cir. 1994).



17
award made to the prevailing party, [but] in substance the 
award is to counsel.” Id. (emphasis in original).

Porter is on appeal on the merits, Porter v. Natsios, No. 
04-5061 (D.C. Cir.), so the plaintiffs tax liability has not yet 
been determined. But the case is instructive in illustrating the 
serious tax consequences that can befall a plaintiff who 
prevails in a Title VII case, as well as pointing to a way out of 
this dilemma. The solution proposed by the district court in 
Porter, and advocated in this amicus brief, harmonizes 
important tax rules with equally compelling principles of civil 
rights law.6

E. The Effect of Statutory Fee Shifting on Banks

The taxpayer in Banks settled his employment case through 
an arrangement in which the defendant paid $464,000, of 
which $314,000 went to Banks himself and $150,000 to his 
lawyer. At the time of settlement, Banks had three viable 
claims under three different statutes—Title VII, 42 U.S.C. 
§1981 and 42 U.S.C. § 1983—and all three were subject to 
statutory fee shifting. 42 U.S.C. § 2000e-5(k) (Title VII), and 
42 U.S.C. § 1988 (§§ 1981, 1983). It does not matter for tax 
purposes if fees are recovered by judicial order or through 
settlement.

In any case subject to fee shifting, settlement discussions 
invariably include the amount of fees at issue, since this is 
part of the defendant’s exposure. Consequently, any

6 As the district court noted in Porter, 293 F.Supp.2d at 154, a 
legislative solution would be welcome, but to date none has been 
forthcoming. Most recently, the Senate in May 2004 passed S. 1637, the 
Jumpstart Our Business Strength (JOBS) bill, which includes a provision 
(§ 643) that permits "above the line" deductions of attorneys' fees 
awarded or paid in cases involving employment disputes, so that such tees 
would not be included in Adjusted Gross Income subject to taxation. The 
House bill, H.R. 4520, contains no such provision, and there has been no 
conference as of the filing of this brief.



settlement includes—either explicitly or (frequently) implic­
itly—a sum devoted to fees. In these circumstances, there 
should be no difference in the tax treatment accorded 
fees awarded by a court or received by counsel as part of 
a settlement.

This Court has repeatedly observed that congressional 
policy favors the amicable resolution of Title VII disputes, as 
opposed to resolution on the merits following contested 
litigation. See Burlington Industries, Inc. v. Ellerth, 524 U.S. 
742. 764 (1998) (noting “Congress’ intention to promote 
conciliation rather than litigation in the Title VII context,” 
and citing EEOC v. Shell Oil Co., 466 U.S. 54, 77 (1984)). 
This pro-settlement policy would be undermined if a Title VII 
plaintiff could secure favorable tax treatment of the fees paid 
to counsel only by going to trial. See Porter v. AID, 293
F.Supp.2d at 155-56 (if “[c]ivil rights plaintiffs who settle 
their claims but are obligated to pay their attorneys fees under 
contingency agreements are treated just like other civil 
litigants under the assignment of income doctrine . . . such 
a result [would be] in direct conflict with the underly­
ing purpose of the fee shifting provisions applicable to civil 
rights litigation”).

In any event, Congress has shown that it believes that 
sums received through settlement should be treated the same 
way, for tax purposes, as amounts recovered through 
resolution on the merits. See. e.g., 26 U.S.C. § 104(a)(2) 
(gross income does not include “the amount of any damages 
(other than punitive damages) received (whether by suit or 
agreement . . .) on account of personal physical injuries or 
physical sickness”) (emphasis added).

It is possible that the amount received by counsel through 
settlement of a Title VII (or other statutory fee) claim would 
be greater than what a court might award; it also might be 
less. But these vagaries are true of all aspects of a settlement, 
including the sum recovered by the plaintiff. If in a particular



19
case the IRS believed that the amount received by counsel 
through settlement materially exceeded any possible court 
award of fees—and if the Service further believed that the 
increment should be seen as income to the plaintiff—then the 
amount allocated to fees could be challenged. The IRS often 
challenges such taxpayer characterizations; indeed, it was 
successful in Banks itself in contesting the plaintiff s effort to 
characterize his settlement recovery as “personal injury 
damages” rather than lost wages. 345 F.3d at 381-82.'

Had the plaintiff in Banks received $314,000 from a jury 
verdict, followed by a fee award of $150,000, the fees would 
not properly be seen as income to the taxpayer. The tax 
treatment is not affected by the fortuity that these amounts 
were recovered through settlement.

Amici understand that the taxpayer in Banks did not 
advance below the argument made here. The Court may, 
however, consider arguments only presented by amici, 
Teague v. Lane, 489 U.S. at 300; Mapp v. Ohio, 367 U.S. 
643, 646 n.3 (1961), and the judgment of the court of appeals 
in Banks can be affirmed on the ground that statutory fees are 
not included in the plaintiffs income.

II. ORDINARY CONTINGENT FEES ARE NOT 
INCOME TO THE PLAINTIFF

The first issue in this case—whether fees received by 
counsel represent income to the plaintiff in statutory fee 
cases—is not a close question. They do not. The result is the 
same for the remaining issue—whether fees received by 7

7 Any IRS challenge to the amount allocated to attorneys’ fees in a Title VII 
settlement would make sense only in a tax regime in which (1) tees received by 
counsel under fee shifting statutes are not deemed income to the plaintiff but (2) 
fees received by counsel in ordinary contingent fee litigation are treated as the 
plaintiffs income. As is shown below, however, fees received by counsel in 
ordinary contingent fee cases should not be considered income to the plaintiff, 
albeit for different reasons than in the statutory fee context.



20
counsel in ordinary contingent fee litigation should be 
deemed the plaintiffs income—although the analysis differs. 
Attorneys’ fees are not income to the plaintiff in either 
situation.

A. The Split in the Circuits

The courts of appeals have divided over the treatment of 
counsel fees in the ordinary, non-fee shifting context. Five 
circuits agree with the IRS and see fees as income to the 
plaintiff, on an assignment of income rationale. Raymond v. 
United States, 355 F.3d 107 (2d Cir. 2004), petition for cert, 
pending, No. 03-1415; Young v. Commissioner, 240 F.3d 369. 
376-79 (4th Cir. 2001); Kenseth v. Commissioner, 259 F.3d 
881 (7th Cir. 2001); Hukkanen-Campbell v. Commissioner, 
274 F.3d 1312 (10th Cir. 2001), cert, denied, 535 U.S. 1056 
(2002); Baylin v. United States, 43 F.3d 1451, 1454-55 (Fed. 
Cir. 1995).

Three other circuits have rejected the IRS position and 
have held that the portion of a judgment due counsel as a 
contingent fee is not income to the plaintiff. Cotnam v. 
Commissioner, supra: Srivastava v. Commissioner, 220 F.3d 
353. 364-65 (5th Cir. 2000); Estate o f Clarks v. United States, 
202 F.3d 854 (6th Cir. 2000); Banks, supra (6th Cir. 2003); 
Davis v. Commissioner, 210 F.3d 1346 (11th Cir. 2000) (per 
curiam): Foster v. United States, 249 F.3d 1275, 1279-80 
(1 1th Cir. 2001). The Fifth and Eleventh Circuit stress that 
counsel was entitled under state law to an ironclad lien on his 
share of the proceeds, while the Sixth has moved from a 
primary focus on state lien law in Estate o f Clarks to a more 
universal approach in Banks that likens the contingent fee 
arrangement to a joint venture in which the lawyer has a 
percentage interest.

The Ninth Circuit has conflicting decisions, depending in 
part on its reading of lien law in different states. Compare 
Banaitis, supra (9th Cir. 2003) (fees received by counsel are



not income to the plaintiff), with cases reaching the opposite 
result: Benci-Woodward v. Commissioner, 219 F.3d 941, 944 
(9th Cir. 2000), cert, denied, 531 U.S. 1112 (2001); Coady v. 
Commissioner, 213 F.3d 1187 (9th Cir. 2000). cert, denied. 
532 U.S. 972 (2001); Sinyard v. Commissioner, supra.

B. The Dispositive Nature of the Joint Venture 
Analogy

As noted. Banks analogized a contingent fee agreement to a 
joint venture. A joint venture is a type of partnership for tax 
purposes, 26 U.S.C. § 761(a), and partners realize income 
only on their “[distributive share of partnership gross 
income.” 26 U.S.C. § 61 (a)(13); see 26 U.S.C. § 702. Hence, 
if a contingent fee arrangement is seen as akin to a joint 
venture, the plaintiff will realize income only on her share of 
the court award (or settlement); in particular, fees received by 
counsel w ill not be deemed income to the plaintiff.

Also in Banks, the court eschewed reliance on state lien 
law, saying that, “[gjiven the various distinctions among 
attorney’s lien laws among the fifty states . . .  a ‘state-by- 
state’ approach would not provide reliable precedent . . .  or 
provide sufficient notice to taxpayers as to [the) tax treatment 
of contingency-based attorneys fees paid from their respect- 
tive jury awards.” 345 F.3d at 385. Under a global approach, 
the issue is whether an ordinary contingent fee relationship is 
more like an assignment of income or a joint venture. It the 
former, the lawyer’s share is properly treated as income to the 
plaintiff. But if the relationship is more like a joint venture, 
the share received by counsel is only counsel's income—not 
the plaintiffs. In fact, the essential attributes of a joint 
venture are present in the contingent fee relationship. 8

8 If it is thought preferable to address the tax consequences of 
contingent fee agreements on a “state-by-state” basis, amici believe that 
the Ninth Circuit in Banaitis properly analyzed the tax treatment that 
flows from Oregon lien law.



22
1. Kensetli

Judge Posner’s opinion in Kenseth, supra, is the best 
articulation of the assignment of income perspective on 
contingent fee agreements, so the decision warrants careful 
examination. Kenseth first describes the tax problem faced 
by the taxpayer, which was aggravated but not entirely caused 
by the AMT. 259 F.3d at 882. The decision then notes that 
”[t]he 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,” id. at 883 The opinion agreed with the Tax Court, 
id., reasoning that a contingent-fee lawyer’s share of a 
recovery should be seen as a business expense for the 
plaintiff. Id. It is simply unfortunate if the tax code does not 
permit lull (or any) deduction of this expense. Id.9

9 Judge Posner notes at the outset of Kenseth that the taxpayer’s 
underlying case dealt with age discrimination. 259 F.3d at 882. The Age 
Discrimination in Employment Act provides for statutory attorneys’ fees, 
see 29 U.S.C. § 626(b) (incorporating among other things the fee shifting 
provisions in 29 U.S.C. § 216(b)), but Kenseth does not address the 
singularities of statutory fee litigation and instead assumes that it is 
dealing with an ordinary contingent fee case.

Only three of the other circuit decisions cited above arose under laws 
permitting fee shifting—Banks itself, Hukkanen-Campbell (Title VII), and 
Sinyard (ADEA). As in Batiks (and Kenseth). the Tenth Circuit in 
Hukkanen-Campbell did not acknowledge that statutory fees were in the 
picture. The Ninth Circuit in Sinyard undertook a cursory examination of 
this issue. After saying that, “[i]f A owes B a debt, and C pays the debt 
on A's behalf, it is elementary that C's payment is income to A as well as 
to B,” 268 F.3d at 758, the majority simply observed that fee awards are 
formally bestowed on the plaintiff, not counsel, id. at 759, citing Evans v. 
JeffD. and Venegas v. Mitchell. As the dissent noted, though, JeffD. and 
Venegas “were decided in a different context—namely, client control over 
the resolution of a case.’’ Id. at 761 n.2. The dissent properly concluded 
that, “[h]ere, defendant C does not satisfy a debt on behalf of plaintiff A; 
rather, C satisfies its own statutory obligation, imposed by the ADEA.” 
Id. at 762.



23
In Kenseth, the taxpayer’s underlying claim arose in 

Wisconsin and, relying on Wisconsin lien law, he argued that 
the lawyer was a co-owner of the underlying claim. Were 
that true, the lawyer’s share of a recovery would merely he 
her entitlement as co-owner; it would not be the plaintiff’s 
business expense. But Kenseth quickly disposed oi any 
argument about co-ownership grounded on Wisconsin lien 
law. Id. at 884.

In the end, Kenseth concluded that “what [the taxpayer] 
really is asking us to do is to assign a portion of his income to 
the law firm.” Id. (emphasis in original). And that does not 
work: “an assignment of income . . .  by a taxpayer is 
ineffective to shift his tax liability.” h i. citing Lucas v. Earl. 
281 U.S. at 114-15.

2. The Economic Realities

The Solicitor General, who addresses only the ordinary 
contingent fee situation, acknowledges that the ultimate tax 
question is one of reasonableness—whether it is “reasonable 
to treat the entire award[] as gross income” to the plaintiff. 
Brief for Petitioner at 13. Reasonableness, in turn, is a 
function of the practical realities oi a situation. And despite 
its holding, Kenseth helps to reveal the economic reality that 
a contingent fee arrangement is a joint venture tor tax 
purposes. As the decision rightly says, though, this has 
nothing to do with state lien law.

Rather, as Judge Posner acknowledged in Kenseth. “there 
is a sense in which contingent compensation constitutes 
the recipient a kind of joint venturer of the payor.” 259 F.3d 
at 883. lie elaborated on this point in his book, Economic 
Analysis o f Law, saying a contingent fee agreement is a 
“situation of joint ownership,” because "a contingent fee 
contract makes the lawyer in effect a cotenant of the property 
represented by the plaintiffs claim.” Id. at 625 (parentheses 
omitted).



24
Consider a tract of land which, undeveloped, has a low' 

value. The owner of the land enters into an agreement with a 
developer, in which the developer agrees to improve the land 
by putting in roads and a sewage system and building houses, 
and in which the parties agree to apportion income from the 
developed land on a 60-40 basis, with the developer entitled 
to 40 percent. In this joint venture, the parties (the land 
owner and the developer) realize income only on their 
respective “distributive share[s]” of the gross income from 
the developed land. See 26 U.S.C. §§ 61(a)(13), 761(a).

Now, assume that a salesperson is hired to sell the houses 
on a commission basis, i.e., a percentage of the sales price of 
each house. As Kenseth correctly says, “the sales income [the 
salesperson] generates is income to the [owner/developer] 
and his commissions are a deductible expense, even though 
they were contingent on his making sales.” 259 F.3d at 883.

The examples of the developer and salesperson show' that a 
contingent compensation arrangement, by itself, is insuf­
ficient to indicate whether the compensation received is 
properly considered a business expense of the owner—and 
hence part of the owner’s income. But if the contingent 
nature of compensation does not explain the difference in tax 
treatment as between the developer and the salesperson, then 
what is the explanation? The Sixth Circuit in Banks, 
harkening back to the language of Lucas v. Earl and 
Helvering v. Horst, says that—with respect to the devel­
oper—the landowner “transferred some of the trees from the 
orchard, rather than simply transferring some of the orchard’s 
fruit.” 345 F.3dat386.

The metaphor used in Banks is not particularly illumi­
nating. Instead, one salient difference between the developer 
and the salesperson is that the developer took significant steps 
to enhance the value of the property. In contrast, the 
salesperson simply sold pieces of the land; he did nothing to



increase its value. The developer creates wealth; the sales­
person does not.

3. The Contingent Fee Lawyer as Joint Venturer

A contingent fee lawyer is like the developer in the 
examples above. The lawyer’s task is to enhance the value of 
property—to take an undeveloped claim and to improve it. so 
that a jury will place a fully compensatory value on it.

Of course, a landowner can hire a developer at a fixed rate 
and finance the development himself, rather than entering 
into a joint venture agreement. If so, the compensation paid 
to the developer is properly seen as a business expense of the 
owner. But if for economic reasons—e.g., a lack of money to 
finance development—the owner elects to make the 
developer a joint venturer, then the developer assumes part of 
the risk. And if this happens, the compensation ultimately 
received by the developer (assuming the enterprise is 
successful) is not the landowner’s business expense. Under 
the Tax Code, it is income solely to the developer. 26 U.S.C. 
§ 61 (a)( 13).

In the same way, the holder of a legal claim may retain a 
lawyer on an hourly basis. If this occurs, the compensation 
received by the lawyer is properly seen as the claimholder’s 
expense. But if the claimholder lacks the money to finance 
litigation and desires to share the risk, she may enter into a 
contingent fee agreement with counsel. If so, the compen­
sation ultimately received by counsel (if the lawsuit is 
successful) is not the claimholder’s business expense and is 
income solely to counsel.

A developer retained at a fixed rate, like a lawyer retained 
on an hourly basis, may engage in wealth creation by 
improving property. But only the developer as joint venturer, 
and the contingent fee lawyer, both (1) create wealth, and (2) 
assume risk. One who both enhances the value of property, 
and who assumes the risk that the property may not be

25



26
profitable, is in the same economic position as the owner of 
the property, whether or not a formal co-tenancy relationship 
exists. Tax law should recognize the economic reality that a 
lawyer retained on a contingent basis is “in effect a cotenant 
of the property represented by the plaintiffs claim.” 
Economic Analysis o f  Law, supra, at 625.10

On the one hand, a contingent fee agreement shares the 
essential attributes of a joint venture—wealth creation and 
assumption of risk. On the other, there are important 
differences between contingent fee arrangements and the 
devices that have been seen as mere assignments of income. 
For example, contingent fee agreements are animated not by 
tax avoidance purpose but rather by economic motive. See 
Economic Analysis o f Law at 624. And application of the 
assignment of income doctrine to the contingent fee setting 
results in double taxation; i.e., counsel's fee is treated as 
income to both counsel and the plaintiff. Double taxation is 
not unprecedented, but it is inefficient economically and 
should not be indulged without the type of clear signal from 
Congress that is lacking here. See Banks, 345 F.3d at 385-86.

Ordinary contingent fee agreements are much closer to 
joint ventures than to the schemes interdicted by the 
assignment of income doctrine. Attorneys’ fees received 
by contingent fee counsel should not be treated as income to 
the plaintiff.

10 Kenseth notes that fees paid to a lawyer retained on an hourly basis 
are treated as the plaintiff s expense and says, “[w]e cannot see what 
difference” a contingent fee arrangement makes. 259 F.3d at 883. The 
difference is counsel’s assumption of risk, which leads to a fundamental 
lack of symmetry: the hourly lawyer is entitled to payment for his services 
even if he loses. But if the contingent fee lawyer loses, she is not entitled 
to payment, and she cannot take a business loss deduction in connection 
with her unreimbursed services.



CONCLUSION
A judicial award of attorneys’ fees under a fee shifting 

statute is manifestly not income to. the plaintiff. The same is 
true of fees recovered as part of a settlement of a claim 
subject to fee shifting. The judgment of the Sixth Circuit in 
Banks can be affirmed on this ground alone.

In addition, fees received by counsel in all contingent fee 
cases, even those that do not arise under fee shifting statutes, 
should not be deemed income to the plaintiff, either, because 
contingent fee agreements are materially the same as joint 
ventures. The judgments in both Banks and Banaitis can be 
affirmed on this ground.

The judgments of the courts of appeals should be affirmed.

Respectfully submitted.

Douglas B. Huron *
Stephen  Z. C her i kof 
Heller, Huron , Chertkof 

Lerner, Simon & Salzman 
1730 M Street, NW, Suite 412 
Washington, DC 20036 
(202)293-8090

* Counsel of Record Attorneys for Amici. Curiae

Angela  Dalfen 
N ational Employment 

Lawyers A ssociation 
44 Montgomery Street, Suite 2080 
San Francisco, CA 94104 
(215) 296-7629



APPENDIX



APPENDIX

The National Employment Lawyers Association (NELA) is 
the only professional membership organization in the country 
comprised of lawyers who represent employees in labor, 
employment and civil rights disputes. NELA and its 67 state 
and local affiliates have a membership of over 3,000 
attorneys who are committed to working on behalf of those 
who have been victims of wrongful termination and unlawful 
employment discrimination. NELA strives to protect the 
rights of its members’ clients, and regularly supports prece­
dent-setting litigation affecting the rights of individuals in the 
workplace. NELA’s members represent clients under all the 
fee shifting statutes set forth in the Statement of Interest.

The NAACP Legal Defense and Educational Fund, Inc. 
(“LDF”) is a non-profit corporation established under the 
laws of the State of New York. It was formed to assist black 
persons in securing their constitutional and statutory rights 
through the prosecution of lawsuits and to provide legal 
services to black persons suffering injustice by reason of 
racial discrimination. For six decades LDF attorneys have 
represented parties in litigation before this Court and the 
lower federal courts involving race discrimination, specifi­
cally including race discrimination in employment. See, e.g.. 
Griggs i’. Duke Power Co., 401 U.S. 424 (1971); Albemarle 
Paper Co. v. Moody, 422 U.S. 405 (1975); Franks v. Bowman 
Transp. Co., 424 U.S. 747 (1976); Bazemore v. Friday, 478 
U.S. 385 (1986); Robinson v. Shell Oil Co., 519 U.S. 337 
(1997). LDF also represented the successful plaintiff in the 
case that established the basic standard for awarding fees 
under federal fee-shifting statutes, Newman v. Piggie Park 
Enterprises, Inc., 390 U.S. 400 (1968), and it has frequently 
appeared before this Court as amicus curiae in matters 
involving the construction of federal civil rights laws.

AARP is a nonpartisan, nonprofit membership organization 
of more than 35 million people aged 50 or older dedicated to



2 a

addressing the needs and interests of older Americans. AARP 
supports and defends the rights of older Americans and the 
laws and public policies designed to protect them. 
Approximately one half of AARP's members remain active in 
the work force and are protected by one or more federal fee- 
shifting statutes, including, inter alia, the Age Discrimination 
in Employment Act, Title VII of the Civil Rights Act of 1964, 
and the Americans with Disabilities Act. Moreover, other 
types of litigation that involve contingent fee arrangements, 
including that conducted pursuant to federal and state 
consumer protection statutes, can be an effective mechanism 
to enforce the rights of older Americans involving a broad 
range of issues. Treating attorneys’ fees, whether awarded 
under fee-shifting statutes or obtained pursuant to a contin­
gency agreement, as taxable income to prevailing plaintiffs 
would be counterproductive to the remedial purposes of 
litigation. Additionally, contrary to the interests of the parties, 
such tax treatment would act as a disincentive to settlements 
and. consequently, unnecessarily burden court systems. 
AARP. therefore, opposes treating attorneys’ fees as taxable 
income to prevailing plaintiffs and urges the Court to affirm 
the decisions below.

Trial Lawyers for Public Justice (TLPJ) is a national public 
interest law firm dedicated to using trial lawyers’ skills and 
approaches to create a more just society. Through precedent­
setting litigation, TLPJ prosecutes cases throughout the 
country designed to enhance consumer and victims’ rights, 
environmental protection, civil rights and liberties, workers’ 
rights, America’s civil justice system, and the protection of 
the poor and powerless. TLPJ is committed to preserving an 
accessible system of justice in this country and appears as 
amicus curiae in this case because the treatment of attorneys’ 
fees as taxable income to the client could further diminish 
access to the courts for those who need legal representation to 
enforce their rights but who cannot afford to pay competent 
counsel on their own.



Public Advocates, Inc., one of the oldest public interest law 
firms in the nation, was founded in 1971 to challenge the 
persistent, underlying causes and effects of poverty and 
discrimination and to work for the empowerment of the poor 
and people of color by raising a voice for social justice in 
government, corporate and other institutions. Public 
Advocates was instrumental in the recognition ol the “private 
attorney general” doctrine in Serrano v. Priest, 20 Cal.3d 25 
(1977), and statutory attorneys’ fees continue to play an 
important role in enabling Public Advocates to represent poor 
communities and individuals today.

The Western Center on Law and Poverty is the oldest and 
largest state support center for California’s legal services 
program serving the poor. The Western Center, which no 
longer receives federal funding, depends on court-awarded 
statutory attorneys’ fees. In most of the Center’s cases, the 
clients do not receive a monetary reward. The possibility that 
the Center's indigent clients nonetheless could owe 
substantial sums of money in taxes would certainly deter 
litigation on their behalf.