                        T.C. Memo. 1998-248



                      UNITED STATES TAX COURT



             WILLIE MAE BARLOW DAVIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4077-96.                        Filed July 7, 1998.



     Robert E.L. Gilpin and Carla R. Cole, for petitioner.

     Robert W. West, for respondent.



                        MEMORANDUM OPINION


     FAY, Judge:   This matter is before the Court on respondent's

motion for partial summary judgment and petitioner's motion for

partial summary judgment filed pursuant to Rule 121.   The parties

have filed various briefs and memoranda in support of and in

opposition to these motions.
                                 - 2 -

     All section references are to sections of the Internal

Revenue Code in effect for the year at issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure,

unless otherwise indicated.

     Respondent determined a deficiency in petitioner's Federal

income tax of $1,441,736 for the taxable year 1992.   Petitioner

resided in Hayneville, Alabama, at the time the petition was

filed in this case.

     The parties agree that this case may be resolved in its

entirety via summary judgment.    The issues remaining for decision

are whether punitive damages received by petitioner are includ-

able in income and whether the amounts paid for attorney's fees

should be excluded from petitioner's income.

                              Background

     The background facts related below are derived from the

pleadings filed in this case, affidavits filed by respondent's

counsel and petitioner's counsel, the parties' uncontroverted

written representations, and the exhibits attached thereto.

     During 1987 and 1988, petitioner owned a home in Alabama

where she resided.    During this time, American Home Improvement

Services of Alabama, Inc. (American Home), was in the business of

making home improvements and arranging for the financing of home

improvements.   Also during this time, Union Mortgage Co. (Union)

made mortgage loans in Alabama.
                                - 3 -

     In 1987, petitioner applied for a $2,000 home loan from

American Home and was denied.    However, in July 1988, a represen-

tative of American Home contacted petitioner and advised her that

her application could be approved if she made certain repairs to

her house.    The repairs would cost $6,000, and this amount would

be added to American Home's loan to petitioner.    On August 2,

1988, petitioner contracted with American Home to make the

necessary repairs, and, in return, American Home lent $8,000 to

petitioner.    Soon thereafter, American Home assigned the $8,000

mortgage to Union.    The day after the contracts were signed,

petitioner decided against making the repairs and attempted to

cancel the repair contract and mortgage loan.    However,

representatives from American Home told petitioner that it was

too late to cancel the repair contract, and the repairs were made

to petitioner's home.1

     On May 11, 1989, petitioner filed suit in the Circuit Court

of Lowndes, Alabama, against Union and American Home.    The

complaint sought compensatory and punitive damages for the

defendants' alleged acts of fraud, conspiracy, and breach of

contract.    The jury awarded petitioner a $6,153,000 verdict

against Union, of which $152,000 was for compensatory damages and

the remaining $6,001,000 consisted of punitive damages.     After a

     1
      The documents ultimately received by petitioner indicate
that, contrary to the representations made by American Home
Improvement Services of Alabama, Inc., on Aug. 3, 1988,
petitioner had until Aug. 5, 1988, to rescind the contracts.
                                - 4 -

hearing on the damages, the circuit court affirmed the jury's

verdict.   In its order, the court indicated that evidence of

mental anguish supported the compensatory award and found that

the punitive damages were not excessive.    Union appealed the

judgment to the Alabama Supreme Court, which affirmed the

judgment but granted a remittitur of $2,000.2   Union ultimately

paid the judgment of $6,151,000 to petitioner's attorneys.

Petitioner and her attorneys had entered into a contingent fee

arrangement whereby the attorneys were entitled to a percentage

of the proceeds arising out of her case, along with the related

legal expenses.   Petitioner's share of the jury award, after

legal fees and expenses were deducted by her attorneys, amounted

to $3,039,191.

     Petitioner did not report any portion of the jury award as

income on her Federal income tax return for 1992.    In the notice

of deficiency, respondent determined that petitioner is required

to report the $6 million she received for punitive damages as

income.    Further, respondent determined that petitioner is

entitled to deduct the attorney's fees and costs as a miscel-

laneous itemized deduction.

                              Discussion



     2
      The Court's opinion can be found at Union Mortgage Co. v.
Barlow, 595 So. 2d 1335 (Ala. 1992). The amounts remitted
related to the $1,000 compensatory damages and the $1,000
punitive damages awarded for the conspiracy claim.
                                 - 5 -

     A motion for summary adjudication may be granted if the

pleadings and other materials demonstrate that no genuine issue

of material fact exists, and the decision may be rendered as a

matter of law.   Rule 121(b); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).    As

noted above, the parties agree that the issues in this case may

be resolved by summary adjudication, and we are satisfied that no

genuine issue exists as to the material facts.

     First, we address whether the punitive damages petitioner

received may be excluded under section 104(a)(2).    Respondent

contends that this issue is controlled by the recent Supreme

Court decision in O'Gilvie v. United States, 519 U.S. 79, 117

S. Ct. 452 (1996).   In O'Gilvie v. United States, supra, the

Supreme Court held that the exclusion of section 104(a)(2) does

not apply to punitive damages.     Id. at ___, 117 S. Ct at 454.

Therefore, respondent argues that petitioner's punitive damage

award of $6 million is fully taxable.

     Petitioner points out that the Supreme Court in O'Gilvie v.

United States, supra, interpreted section 104(a)(2) as it read in

1988.   Petitioner notes that section 104(a)(2) was amended in

1989, and since the award was paid to petitioner in 1992,

petitioner argues that the rule in O'Gilvie does not apply to

this case.   We disagree.   The 1989 amendment to section 104(a)(2)

was enacted in the Omnibus Budget Reconciliation Act of 1989

(OBRA 1989), Pub. L. 101-239, sec. 7641(a), 103 Stat. 2106, 2379.
                                - 6 -

OBRA 1989 section 7641(b)(2)(B), 103 Stat. 2379, provides that

the amendment to section 104(a)(2) shall not apply to any amount

received pursuant to any lawsuit filed on or before July 10,

1989.    Petitioner's lawsuit against Union was filed on May 11,

1989, 2 months before the effective date of the amendment.

Therefore, this case is governed by section 104(a)(2) as it read

before the amendment, which is the same version interpreted by

the Supreme Court in O'Gilvie v. United States, supra.     We

conclude that O'Gilvie is controlling authority, and accordingly

the punitive damages received by petitioner are not excludable

under section 104(a)(2).

     Next, we address whether the amounts retained by

petitioner's attorneys should be excluded from petitioner's

income.    Respondent determined that petitioner must include the

full amount of the punitive damages award in income but that she

may deduct the attorney's fees as a miscellaneous itemized

deduction.    Petitioner contends that she is required to report as

income only that portion of the award paid to her by her

attorneys.

     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).3   In Cotnam the taxpayer was awarded a judgment of

     3
      The Court of Appeals for the Eleventh Circuit, which
includes Alabama, has adopted as binding precedent the case law
of the former Court of Appeals for the Fifth Circuit as of
                                                   (continued...)
                                - 7 -

$120,000 and paid attorney's fees of $50,365.83 pursuant to a

contingent fee arrangement.   The Commissioner treated the

$120,000 as taxable income and allowed a deduction for the

attorney's fees.   The Court of Appeals for the Fifth Circuit held

that the $50,365.83 in attorney's fees should not have been

included in the taxpayer's income.      Id. at 125.

     Respondent makes several arguments to the effect that

contingent attorney's fees should not reduce the amount of a

judgment but constitute a miscellaneous itemized deduction.    See,

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

Bagley v. Commissioner, 105 T.C. 396, 418-419 (1995), affd. 121

F.3d 393 (8th Cir. 1997).    Under the Golsen rule, however, we

follow the law of the circuit in which this case is appealable,

here the Eleventh Circuit.    Golsen v. Commissioner, 54 T.C. 742

(1970), affd. 445 F.2d 985 (10th Cir. 1971).     Under Bonner v.

City of Prichard, Alabama, 661 F.2d 1206 (11th Cir. 1981),

decisions of the former Court of Appeals for the Fifth Circuit

are binding precedent for courts in the Eleventh Circuit.

Respondent has not brought to our attention any legal authority

that overrules the Court of Appeals for the Fifth Circuit's

opinion in Cotnam v. Commissioner, supra, a case that is squarely


     3
      (...continued)
Sept. 30, 1981, unless and until such precedent is overruled or
modified by the Court of Appeals for the Eleventh Circuit.
Bonner v. City of Prichard, Alabama, 661 F.2d 1206 (11th Cir.
1981).
                                 - 8 -

on point.   On brief, respondent candidly admits that this Court

may feel constrained to follow the rule in Cotnam.        In fact, we

do feel so constrained.4   Accordingly, we find that the portion

of the award retained by petitioner's attorneys should be

excluded from her income, and she is entitled to summary judgment

on this issue.

     We have considered all other arguments made by the parties

and find them to be either irrelevant or without merit.

     To reflect the foregoing,

                                         An appropriate order granting

                                 petitioner's motion for partial

                                 summary judgment and granting

                                 respondent's motion for partial

                                 summary judgment will be issued,

                                 and decision will be entered under

                                 Rule 155.




     4
      Recently, the Bankruptcy Court for the Middle District of
Alabama followed the rule in Cotnam v. Commissioner, 263 F.2d 119
(5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947
(1957), notwithstanding the contrary authority in Baylin v.
United States, 43 F.3d 1451 (Fed. Cir. 1995). See Hamilton v.
United States, 212 Bankr. 384 (Bankr. M.D. Ala. 1997).
