                        T.C. Memo. 1998-291



                      UNITED STATES TAX COURT



           FRANKLIN P. AND NONA COADY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4722-97.                      Filed August 6, 1998.



     Lance A. Hulbert, for petitioners.

     Gregory M. Hahn, for respondent.


                        MEMORANDUM OPINION


     LARO, Judge:   This case is before the Court fully

stipulated.   See Rule 122.   Franklin P. and Nona Coady petitioned

the Court to redetermine respondent's determination of a $49,531

deficiency in their 1994 Federal income tax.    Following

concessions, we must decide whether petitioners' 1994 gross

income includes $373,307 that was awarded to Ms. Coady as
                                 - 2 -


compensation for a wrongful termination, or a lesser amount that

is net of the legal fees and other costs that she incurred to

recover this award.   We hold it is the greater amount.   Unless

otherwise stated, section references are to the Internal Revenue

Code in effect for the year in issue.    Rule references are to the

Tax Court Rules of Practice and Procedure.    Dollar amounts are

rounded to the nearest dollar.

                            Background

     All facts have been stipulated.1    The stipulated facts and

the exhibits submitted therewith are incorporated herein by this

reference.   When petitioners petitioned the Court, they resided

in Lake Havasu City, Arizona.    They are husband and wife, and

they filed a 1994 Form 1040, U.S. Individual Income Tax Return,

using the filing status of "Married filing joint return".

     On May 5, 1990, Ms. Coady was discharged from her employment

with Alaska Housing Finance Corporation (AHFC).    Thereafter,

while she resided in Alaska, she retained an attorney in the

Alaska office of the law firm of Hellen, Partnow & Condon (HPC)

to represent her in a wrongful termination suit against AHFC.

According to the terms of that representation:

          [Ms. Coady is] responsible for all costs incurred,
     e.g. filing fees, long distance telephone calls,

     1
       Petitioners ask the Court to find a fact from a letter
that they attached to their posttrial brief. We decline to do
so. This letter is not evidence. Rule 143(b); see also Boyd
Gaming Corp. v. Commissioner, T.C. Memo. 1997-445.
                               - 3 -


     telefax transmissions, photocopies, deposition charges,
     witness fees, computer research fees, appraiser's fees,
     travel expenses for attorneys or witnesses, expert
     consultation charges, cost of the investigation.

          Attorney time will be compensated on the basis of the
     following contingent fee schedule:

          33-1/3% if recovery is arrived at without appeal of any
     judgment.

          45% in the event that any judgment is appealed and
     representation continues after a notice of appeal is filed.

     On or about April 13, 1991, HPC, on behalf of Ms. Coady,

filed suit against AHFC and certain individuals in the Superior

Court for the State of Alaska, alleging damages arising from a

wrongful termination of Ms. Coady's employment.   Following a non-

jury trial, the court held AHFC, but not the individuals, liable

for Ms. Coady's wrongful termination and awarded her the

following damages:

     Lost past earnings                       $89,225
     Lost future earnings                      76,980
     Lost fringes and lost pension            207,102
        Total                                 373,307

     AHFC paid Ms. Coady the awarded damages on November 7, 1994,

issuing her a check for $259,611 and withholding $113,696 for

Federal and State taxes.   In the same year, Ms. Coady paid HPC

legal fees and litigation costs totaling $221,338; of this

amount, $124,436 represented HPC's contingent fee (33-1/3% x

$373,307) and $96,903 represented litigation costs.     AHFC issued

Ms. Coady a 1994 Form W-2, Wage and Tax Statement, reporting that
                               - 4 -


it paid her the $373,307 award as "wages, tips, other

compensation."

     On their 1994 Form 1040, petitioners included the $373,307

award in wages, and claimed a $284,082 "above-the-line" deduction

for the amount of the award that was not paid on account of past

earnings.   Petitioners claimed and reported on their return that

the $284,082 was received by Ms. Coady as self-employment income,

and they claimed that $168,217 of the legal fees and costs was

deductible from this income, resulting in net income from self-

employment of $115,865.2   Petitioners claimed a miscellaneous

itemized deduction of $53,121 with respect to the remaining legal

fees and costs.

     Respondent determined, and reflected in a notice of

deficiency issued to petitioners on December 10, 1996, that

petitioners' 1994 gross income includes the total award of

$373,307.   Respondent also determined that petitioners' legal

fees and costs totaling $221,338 were deductible as a

miscellaneous itemized deduction subject to the 2-percent floor

under section 67.   Petitioners concede that none of the award,

legal fees, or costs was attributable to self-employment.

                            Discussion


     2
      Petitioners' allocation to self-employment of legal fees
and costs bears the same ratio (as rounded) as petitioners'
allocation to self-employment of the award; i.e.,
$168,217/$221,338 = $284,082/$373,307.
                               - 5 -


     Petitioners argue that their 1994 gross income does not

include the entire $373,307 award.     According to petitioners,

$221,338 of the award is excluded from their gross income because

it was paid to Ms. Coady's counsel, HPC, under the contingent fee

agreement.   Petitioners rely on Cotnam v. Commissioner, 263 F.2d

119 (5th Cir. 1959), revg. in part and affg. in part 28 T.C. 947

(1957).3   In the Cotnam case, the taxpayer had entered into a

contingent fee agreement with her attorneys, under which the

taxpayer agreed to pay the attorneys 40 percent of any amount

recovered on a claim that they prosecuted on her behalf.     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 they 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 applicable State (Alabama) law, the

contingent fee agreement 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 to reach its conclusion:

          2. Upon suits, judgments, and decrees for money,
     * * * [attorneys] shall have a lien superior to all

     3
       See also Davis v. Commissioner, T.C. Memo. 1998-248
(following Cotnam as to the law of the circuit).
                               - 6 -


     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. [Id. at 125
     n.5 (quoting 46 Ala. Code sec. 64 (1940); quotation
     marks omitted).]

     We disagree with petitioners that Cotnam v. Commissioner,

supra, controls the Court's decision herein.    In our case, the

relevant section 34-35-430 of the Alaska Code, i.e., the statute

that is applicable here, provides as follows:

          Sec. 34-35-430. Attorney's lien. (a) An attorney has
     a lien for compensation, whether specially agreed upon or
     implied, as provided in this section
          (1) first, upon the papers of the client that have
     come into the possession of the attorney in the course
     of the professional employment;
          (2) second, upon money in the possession of the
     attorney belonging to the client;
          (3) third, upon money in the possession of the
     adverse party in an action or proceeding in which the
     attorney is employed, from the giving of notice of the
     lien to that party;
          (4) fourth, upon a judgment to the extent of the
     costs included in the judgment or, if there is a
     special agreement, to the extent of the compensation
     specially agreed on, from the giving of notice of the
     lien to the party against whom the judgment is given
     and filing the original with the clerk where the
     judgment is entered and docketed.
          (b) This lien is, however, subordinate to the
     rights existing between the parties to the action or
     proceeding. [Alaska Stat. sec. 34-35-430 (Michie
     1996).]

This provision stands in marked contrast to the provision of the

Alabama Code relied upon by the Court of Appeals for the Fifth

Circuit in the Cotnam case.   Although both provisions give an
                                 - 7 -


attorney a lien to secure his or her compensation, the Alaska

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.    In contrast to a client subject

to the Alabama provision, a client subject to the Alaska

provision retains all proprietary rights in his or her claim,

subject to a statutory lien held by the attorney on any proceeds

from the claim.   See, e.g., Hagans, Brown & Gibbs v. First Natl.

Bank, 783 P.2d 1164, 1168 (Alaska 1989) ("the claim belongs to

the client and not to the attorney; the client has a right to

compromise or even abandon his claim if he sees fit to do so");

see also Phillips v. Jones, 355 P.2d 166, 171 (Alaska 1960)

(intent of Alaska attorney lien provision is to give attorneys

security for their efforts through a lien on the subject of the

action).   The Alaska provision also subordinates an attorney's

lien "to the rights existing between the parties to the action or

proceeding", whereas the lien of an attorney under the Alabama

provision is "superior to all liens but tax liens".   In fact, the

Alaska provision is similar to provisions of the Nebraska and

South Dakota Codes, which we held in Petersen v. Commissioner,

38 T.C. 137, 151-152 (1962), were distinguishable from the

provisions of the Alabama Code considered by the Court of Appeals
                               - 8 -


for the Fifth Circuit in Cotnam v. Commissioner, supra.4    See

also Baylin v. United States, 43 F.3d 1451, 1455 (Fed. Cir. 1995)

(Maryland attorney lien statute does not give attorney an

ownership interest in claim of his or her client); Estate of

Gadlow v. Commissioner, 50 T.C. 975, 979-980 (1968) (Pennsylvania

law distinguishable from Alabama statute applied in Cotnam).

     We hold that Ms. Coady's award, undiminished by the amount

that she paid her attorneys, is includable in petitioners' 1994

gross income under the principle of Lucas v. Earl, 281 U.S. 111

(1930).5   Accord Estate of Gadlow v. Commissioner, supra at

979-980; Petersen v. Commissioner, supra at 151-152; Hardin v.

Commissioner, T.C. Memo. 1997-202; Martinez v. Commissioner,


     4
       The Nebraska provision as set forth in Petersen v.
Commissioner, 38 T.C. 137, 152 n.9 (1962), provided:

           §7-108. Attorney's liens. An attorney has a
           lien for a general balance of compensation
           upon any papers of his client which have come
           into his possession in the course of his
           professional employment; and upon money in
           his hands belonging to his client, and in the
           hands of the adverse party in an action or
           proceeding in which the attorney was employed
           from the time of giving notice of the lien to
           that party.

The South Dakota provision was similar to the Nebraska provision.
Id.

     5
       We reject petitioners' claim that this principle is
inapplicable because Ms. Coady's claim was "contingent" or
"uncertain". The cases cited by petitioners to support that
claim are distinguishable on their facts.
                               - 9 -


T.C. Memo. 1997-126; Alexander v. Commissioner, T.C. Memo.

1995-51, affd. 72 F.3d 938, 946-947 (1st Cir. 1995).     We have

considered all arguments by petitioners for a contrary holding,

and, to the extent not mentioned above, find them to be without

merit.   To reflect concessions by respondent,

                                            Decision will be entered

                                       under Rule 155.
