       RECOMMENDED FOR FULL-TEXT PUBLICATION
            Pursuant to Sixth Circuit Rule 206
   ELECTRONIC CITATION: 2000 FED App. 0020P (6th Cir.)
               File Name: 00a0020p.06


UNITED STATES COURT OF APPEALS
              FOR THE SIXTH CIRCUIT
                _________________


                            ;
                             
ESTATE OF ARTHUR L.
                             
CLARKS, by and through its
                             
duly appointed Independent
                             
                                      No. 98-2437
Personal Representative,
                             
MARY J. BRISCO-WHITTER,       >
also known as MARY J.        
                             
                             
CLARKS,

                             
          Plaintiff-Appellant,
                             
                             
         v.
                             
UNITED STATES OF AMERICA, 
        Defendant-Appellee. 
                             
                            1

      Appeal from the United States District Court
   for the Eastern District of Michigan at Ann Arbor.
    No. 96-60446—George C. Steeh, District Judge.
             Argued: December 16, 1999
         Decided and Filed: January 13, 2000




                           1
2       Clarks v. United States                         No. 98-2437       No. 98-2437                      Clarks v. United States       7

        Before: MERRITT and SILER, Circuit Judges;                        interest, only a hope to receive money from the lawyer's
                BECKWITH, District Judge.*                                efforts and the client's right, a right yet to be determined by
                                                                          judge and jury. Clarks, as an assignor, had no predetermined
                      _________________                                   interest in any res before entering a contingency fee
                                                                          arrangement with his attorney, unlike the taxpayer plaintiffs
                            COUNSEL                                       in Lucas and Horst. There was no purpose to shift tax
                                                                          liability among members of a family.
ARGUED: Harley D. Manela, LAKRITZ, HERMAN &
WISSBRUN, Bingham Farms, Michigan, for Appellant.                           In Lucas and Horst, the assignees were the object of gifts
Kenneth W. Rosenberg, U.S. DEPARTMENT OF JUSTICE,                         and not subject to income taxation themselves if the income
APPELLATE SECTION, TAX DIVISION, Washington,                              was taxed to their assignor or donor. The IRS chose to tax the
D.C., for Appellee. ON BRIEF: Harley D. Manela,                           assignors, not both the donors and donees. By having the
LAKRITZ, HERMAN & WISSBRUN, Bingham Farms,                                income taxed to the donor, the donee escapes income
Michigan, for Appellant. Kenneth W. Rosenberg, Kenneth L.                 taxation. Not so here. Here the lawyer is taxed on the full
Greene, U.S. DEPARTMENT OF JUSTICE, APPELLATE                             amount of the payment. Under the government’s theory both
SECTION, TAX DIVISION, Washington, D.C., for Appellee.                    the lawyer and the client are taxable.
                      _________________                                      The present transaction under scrutiny is more like a
                                                                          division of property than an assignment of income. Here the
                          OPINION                                         client as assignor has transferred some of the trees in his
                      _________________                                   orchard, not merely the fruit from the trees. The lawyer has
                                                                          become a tenant in common of the orchard owner and must
  MERRITT, Circuit Judge. The question on appeal                          cultivate and care for and harvest the fruit of the entire tract.
concerns the federal income taxation of clients on contingent             Here the lawyer’s income is the result of his own personal
fees paid to lawyers. In June 1988, a jury awarded Arthur                 skill and judgment, not the skill or largess of a family member
Clarks $5,600,000 in personal injury damages against K-Mart               who wants to split his income to avoid taxation. The income
for head injuries sustained while unloading his truck. In                 should be charged to the one who earned it and received it,
1991, K-Mart paid $11,307,875.55 in total satisfaction of the             not as under the government’s theory of the case, to one who
judgment, $5,600,000 for the award and $5,707,837.55 in                   neither received it nor earned it. The situation is no different
interest. From that amount, the judgment debtor paid Clarks’              from the transfer of a one-third interest in real estate that is
lawyer under a one-third, contingent fee contract                         thereafter leased to a tenant. See Wodehouse v. Comm’r, 177
$1,865,156.54 based on the original award and $1,901,314.67               F.2d 881, 884 (2d Cir. 1949); Surrey, “Assignments of
based on the interest for a total fee of $3,766,471.21. After             Income and Related Devices, Choice of the Taxable Person,”
Clarks died in March 1992, his estate filed his 1040 for the              33 COL. L. REV. 791 (1933).
1991 tax year. Recovery for personal injury is ordinarily not
taxable under § 104(a)(2) of the Internal Revenue Code, but                 For the forgoing reasons, we reverse the judgment of the
the interest on the award is. The only question before us on              district court and grant plaintiff estate's motion for summary
                                                                          judgment.
    *
     The Honorable Sandra S. Beckwith, United States District Judge for
the Southern District of Ohio, sitting by designation.
6    Clarks v. United States                     No. 98-2437      No. 98-2437                        Clarks v. United States     3

never received the income apportioned to his wife and Horst       appeal is whether the $1,901,314.67 in interest paid to the
never actually received any interest from the coupons, both       lawyer must be included as gross income of the decedent
claimed that they should not have to include the assignment       under § 61(a) of the tax code (“gross income means all
as income. In rejecting the taxpayer’s argument, the Supreme      income from whatever source derived”), as well as included
Court concluded that the "dominant purpose of the revenues        in the lawyer’s income. The estate did not include the interest
laws is the taxation of income to those who earn or otherwise     portion of the attorney fee award as interest income because
create the right to receive it and enjoy the benefit of it when   the estate did not receive any of the money. It was paid
paid." Horst, 311 U.S. at 119. In Lucas and Horst, each           directly to the lawyer.
taxpayer earned and created the right to receive and enjoy the
benefit of the income before any assignment.                         In November 1992, the IRS conducted an audit of Clarks'
                                                                  1991 tax return. It notified the decedent’s estate that it had a
   We follow Cotnam concluding that the majority in Cotnam        tax deficiency of $254,298 because the estate improperly
correctly distinguished Lucas v. Earl, 281 U.S. 111 (1930),       failed to include as income the interest paid to the lawyer on
and Helvering v. Horst, 311 U.S. 112 (1940). In the instant       the contingent fee contract and because the interest should be
case, as in Cotnam, the value of taxpayer's lawsuit was           deducted as a miscellaneous itemized deduction subject to a
entirely speculative and dependent on the services of counsel.    two percent of adjusted gross income limitation. See 26
The claim simply amounted to an intangible, contingent            U.S.C. §§ 61(a), 67(a). As a result of the two percent floor on
expectancy. The only economic benefit Clarks could derive         itemized deductions under Code § 67(a) ("miscellaneous
from his claim against the defendant in state court was to use    itemized deductions... allowed only to the extent that the
the contingent part of it to help him collect the remainder.      aggregate of such deductions exceeds 2 percent of adjusted
Like an interest in a partnership agreement or joint venture,     gross income") and the alternative minimum tax applicable to
Clarks contracted for services and assigned his lawyer a one-     interest income under Code § 55, the estate had to pay the
third interest in the venture in order that he might have a       additional $254,298 in taxes owed, plus interest. The estate
chance to recover the remaining two-thirds. Just as in            filed an action in federal district court seeking a refund of all
Cotnam, the assignment Clarks' lawyer received operated as        tax and interest paid on the interest portion of the damage
a lien on a portion of the judgment sought to be recovered        award for the 1991 tax year. At no time has the non-interest
transferring ownership of that portion of the judgment to the     portion of the award ($5,600,000) been at issue since it is
attorney.                                                         clearly not taxable as income pursuant to 26 U.S.C.
                                                                  § 104(a)(2). Neither is there an issue before us concerning the
  In Lucas and Horst, the income assigned to the assignee         taxation of the income in the hands of the lawyer. Both
was already earned, vested and relatively certain to be paid to   parties filed cross motions for summary judgment. The
the assignor. It was a gift of accrued income to a family         district court granted summary judgment for the government
member. The assignor’s purpose was to split income with a         and against the taxpayer. We do not agree.
family member and avoid the donor’s higher rate under the
progressive income tax. The income had a tangible known                                      *   *     *
value to the assignor. The assignee performed no services in
order to receive the income. There was no business purpose          There is a conflict in the Circuits on the issue of whether
other than tax avoidance. There was no joint venture to           the interest portion of an attorney's contingency fee should be
reduce a speculative claim to money. Not so in this case.         included in the client’s income under Code § 61(a), even
Here there was no res, no fund, no proceeds, no vested            though the lawyer received and paid taxes on all of the money
4      Clarks v. United States                       No. 98-2437     No. 98-2437                      Clarks v. United States       5

and the client received none of the money. Compare Cotnam              the control of the court, it would not allow the client to
v. Comm'r, 263 F.2d 119 (5th Cir. 1959), with Baylin v.                obtain it until he had paid his attorney, and in
United States, 43 F.3d 1451 (Fed. Cir. 1995). Cotnam was               administering the fund it would see that the attorney was
the first to address the issue. In a 2-1 decision, the old Fifth       protected. If the thing recovered was in a judgment, and
Circuit held that the amount of the contingent fee paid out of         notice of the attorney’s claim had been given, the court
the judgment to plaintiff's attorneys was not income to                would not allow the judgment to be paid to the prejudice
plaintiff. See Cotnam, 263 F.2d at 126. Under Alabama state            of the attorney.” [Quoting Goodrich v. McDonald, 112
law, a contingency fee contract operates as a lien on the              N.Y. 157, 19 N.E. 649 (1889)].
recovery. The Alabama code provided at the time that
"attorneys at law shall have the same right and power over           Although the underlying claim for personal injury was
said suits, judgments and decrees, to enforce their liens, as        originally owned by the client, the client lost his right to
their clients had or may have for the amount due thereon to          receive payment for the lawyer’s portion of the judgment.
them." 46 ALA. CODE § 64 (1940). The Cotnam court found              Michigan law is not inconsistent with this view of the
that this lien operated as a transfer of part of plaintiff's claim   attorney’s lien, Dreiband v. Candler, 166 Mich. 49, 131 N.W.
and that any recovery as to that portion of the claim would not      129 (1911), — holding that “the [contingent fee] agreement
be regarded as gross income to the plaintiff taxpayer.               amounts to an assignment of a portion of the judgment sought
Cotnam, 263 F.2d at 125. The court concluded that the                to be recovered.” Id. at 51, 131 N.W. at 129.
amount of the contingent fee was earned by the attorney, not
the taxpayer, whose only real economic benefit from the                In a more recent decision, the Federal Circuit reached the
claim amounted to a percent of the total judgment he received        opposite result. Baylin held that the contingent fee portion of
due to the lawyer's efforts. See id. at 126.                         settlement from a condemnation proceeding paid directly to
                                                                     the lawyer was income to the plaintiff taxpayer. Baylin, 43
  The common law lien in this case under Michigan law                F.3d at 1455. Baylin mentioned the Supreme Court's liberal
operates in more or less the same way as the Alabama lien in         interpretation of "gross income" and then found that although
Cotnam. RAY ANDREWS BROWN, THE LAW OF PERSONAL                       the plaintiff never had actual possession of the funds paid to
PROPERTY § 116, at 559 (2d ed. 1955), describes a common             the lawyer, plaintiff received the benefit of those funds in that
law attorney’s lien as follows:                                      they discharged an obligation of the plaintiff owed to the
                                                                     lawyer as a result of his work. See Baylin, 43 F.3d at 1454.
    According to Mr. Justice Earl, of the New York Court of
    Appeals, “the lien, as thus established, is not strictly like      Baylin relied on two early Supreme Court tax cases
    any other lien known to the law, because it may exist            interpreting § 61(a), Lucas v. Earl, 281 U.S. 111 (1930) and
    although the attorney has not and cannot, in any proper          Helvering v. Horst, 311 U.S. 112 (1940). In Lucas, taxpayer
    senses, have possession of the judgment recovered. It is         Earl assigned one half his right to salary and fees earned by
    a peculiar lien, to be enforced by peculiar methods. It          him to his wife in order to avoid paying taxes on the whole,
    was a device invented by the courts for the protection of        Lucas, 281 U.S. at 113-14. In Horst, taxpayer Horst, the
    attorneys against the knavery of their clients, by disabling     owner of negotiable bonds, detached from them negotiable
    clients from receiving the fruits of recoveries without          interest coupons shortly before their due date and delivered
    paying for the valuable services by which the recoveries         them as a gift to his son who later that year collected interest
    were obtained. The lien was never enforced like other            on them. Horst, 311 U.S. at 114. Even though the proceeds
    liens. If the fund recovered was in possession or under          were originally vested in the donors, since Lucas himself
