                         T.C. Memo. 2005-177



                       UNITED STATES TAX COURT



                 ROBERT L. ALLUM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2424-03.               Filed July 20, 2005.


     Robert L. Allum, pro se.

     Richard D. D’Estrada, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:    Respondent determined a deficiency of

$185,491 in petitioner’s Federal income tax for 1999.    The issues

for decision1 are:    (1) Whether settlement proceeds petitioner


     1
      Petitioner also raised several constitutional and
jurisdictional issues regarding the validity of this Court and
the Internal Revenue Code in general, including whether this
Court, as an Art. I court exercising jurisdiction over this case,
                                                   (continued...)
                               -2-

received may be excluded from his gross income under section

104(a)(2);2 and (2) if the total settlement proceeds are not

excluded under section 104(a)(2), whether a portion of the

settlement proceeds that petitioner paid to his attorney as a

contingent fee3 may be excluded from petitioner’s gross income.4


     1
      (...continued)
violates Amends. V, VI, and VII of the U.S. Constitution.
Petitioner’s arguments are specious and frivolous, resembling in
tone the type of tax-protester arguments with which we are
sometimes presented. We shall not address petitioner’s
“constitutional” arguments “with somber reasoning and copious
citation of precedent; to do so might suggest these arguments
have some colorable merit.” Crain v. Commissioner, 737 F.2d
1417, 1417 (5th Cir. 1984). We simply point out that this Court
is a court of law, Freytag v. Commissioner, 501 U.S. 868, 890-891
(1991), with jurisdiction to decide income tax issues of the type
raised in this case, secs. 6211-6214, I.R.C. 1986.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     3
      In this case, the attorney’s fee was a fixed fee that was
contingent upon the successful settlement of petitioner’s claims.
Although the amount of the fee was not dependent on the amount of
the settlement, the fee nevertheless was a contingent fee in that
it was payable only if a settlement was successfully negotiated
and consummated. See Black’s Law Dictionary 338 (8th ed. 2004)
(a contingent fee is “A fee charged for a lawyer’s services only
if the lawsuit is successful or is favorably settled out of
court”).
     4
      Respondent concedes that the $75,000 fee paid to
petitioner’s attorney is deductible, but only “as a miscellaneous
itemized deduction, subject to the restrictions of sections 67
and 68 and, if appropriate, the application of the Alternative
Minimum Tax provisions, sections 55 and 56.” In his reply brief,
petitioner argues for the first time that the attorney’s fee is
deductible or excludable as a Schedule C, Profit or Loss From
Business, expense but did not offer any evidence at trial that
                                                   (continued...)
                                 -3-

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and supplemental stipulation of facts

are incorporated herein by this reference.    Petitioner resided in

Bozeman, Montana, when his petition in this case was filed.

     During the 1980s, petitioner was employed as a Federal

Housing Administration (FHA) underwriter with the Valley Mortgage

Company (Valley).    Valley engaged in an illegal loan scheme,

which petitioner reported to both Valley’s head underwriter and

the FHA.    In 1989, Valley terminated petitioner’s employment.

     In 1991, petitioner brought suit against Valley in the

Washoe County District Court of Nevada, alleging wrongful

termination, defamation, and violations of Nevada’s Racketeer

Influenced and Corrupt Organizations Act (RICO).    A jury decided

against petitioner on the wrongful termination and defamation

claims.    The Washoe County District Court dismissed the RICO

claim, which dismissal the Supreme Court of Nevada affirmed.      See

Allum v. Valley Bank, 849 P.2d 297 (Nev. 1993).



     4
      (...continued)
the fee was deductible under sec. 162. Moreover, petitioner did
not give respondent any notice in his amended petition, his
pretrial memorandum, or at trial that he was claiming the fee was
deductible under sec. 162. We conclude, therefore, that
petitioner did not timely raise the sec. 162 issue, and we
decline to decide it. DiLeo v. Commissioner, 96 T.C. 858, 891
(1991), affd. 959 F.2d 16 (2d Cir. 1992); Foil v. Commissioner,
92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990);
Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).
                               -4-

     In 1994, petitioner brought suit against Valley’s successor,

Bank of America (the bank), a Nevada Supreme Court justice who

participated in the 1993 decision, and others (together,

defendants) in the U.S. District Court for the District of Nevada

(District Court) in case No. CV-N-94-455.   Petitioner’s complaint

alleged that the defendants violated his civil rights under 42

U.S.C. sec. 1983 during the State court proceedings and conspired

to violate Federal and State RICO statutes.

     Petitioner’s civil rights complaint in case No. CV-N-94-455

(complaint) consisted of alleged violations of his rights to

procedural and substantive due process.   Petitioner alleged that

his procedural due process rights were violated by certain of the

defendants, including the bank, providing financial support to

“lawyer politicians” seeking elected judicial office in Nevada,

so as to create an

     atmosphere of “obligation” on the part of the lawyer
     politician who is elected to the position of district
     court judge or Nevada Supreme Court Justice to
     facilitate obtaining “legal protection” from said
     elected lawyer politician * * * for any of the conduct
     or actions of these Defendants which result in legal
     action being taken against them.

Petitioner claimed that, as a result of this atmosphere of

obligation, his procedural due process rights were further

violated through misconduct of the Nevada judiciary that

included:
                              -5-

      1.   Accepting perjured documents and testimony from the

defendants;

      2.   denying petitioner a full and fair opportunity to

access the discovery process;

      3.   generally failing to comply with the Canons of

Judicial Conduct;

      4.   applying improper standards of adjudication to

petitioner’s motions and complaints;

      5.   fabricating the fact that petitioner “participated

in the illegal [RICO] scheme by virtue of his underwriting”,

see Allum v. Valley Bank, 849 P.2d 297, 301-302 (Nev. 1993);

and

      6.   advocating on behalf of the defendants.

Correspondingly, petitioner claimed that the defendants, in

furtherance of Nevada’s “‘good ole boy network’”, violated his

substantive due process right by using him as “an example” to

promote the protection afforded to the lawyer politicians’

contributors and coerce the contributors’ employees into

submitting to abuse and hostile working conditions.

      Petitioner also alleged in his complaint that he suffered

unspecified physical and emotional damages as the result of the

civil rights violations, and he sought both punitive and

compensatory damages.    In regard to his RICO claims, petitioner

alleged that he lost income and incurred the costs of prosecuting
                               -6-

and defending various lawsuits with the defendants as a result of

their alleged racketeering activities, and he sought treble

damages.

     The District Court dismissed petitioner’s claims of judicial

errors in the State court for lack of jurisdiction, granted

summary judgment against him on his remaining claims, and denied

his discovery-related motions as moot.   On March 31, 1998, the

Court of Appeals for the Ninth Circuit reversed the District

Court’s order denying petitioner’s discovery motions and that

part of the District Court’s decision granting summary judgment

on petitioner’s due process claims, and remanded the case back to

the District Court.5

     In 1999, petitioner filed another suit in the District

Court, this time against the State of Nevada, members of the

office of the attorney general of the State of Nevada, and a

former Nevada Supreme Court justice, alleging violations of his

civil rights under 42 U.S.C. sec. 1983 and a conspiracy to


     5
      In all other respects, the Court of Appeals for the Ninth
Circuit affirmed the District Court’s decision. In disposing of
petitioner’s RICO claims, the Court of Appeals for the Ninth
Circuit noted that petitioner had alleged that he suffered
“emotional and physical distress, lost income and litigation
expenses related to prosecuting and defending lawsuits, wrongful
termination, libel, and loss of his professional license.” The
Court of Appeals found, however, that although only the loss of
the professional license could constitute injury to “business or
property” for purposes of the RICO claims, petitioner had not
shown he had been deprived of his professional license, “much
less that such deprivation was the result of racketeering
activities on the part of the * * * [defendants]”.
                                -7-

violate his civil rights in connection with case No. CV-N-94-455.

During 1999, petitioner also entered into negotiations to settle

case No. CV-N-94-455 with the bank and certain other defendants.

Petitioner hired an attorney, Kenneth McKenna, to represent him

in the negotiations.   Petitioner and Mr. McKenna agreed that

petitioner would pay him a fee of $75,000 for his services if the

negotiations were successful.

     In approximately November 1999, petitioner and the bank

signed a “GENERAL RELEASE AND SETTLEMENT AGREEMENT” (the

agreement).   The agreement provided:

          3.a. Payment to be Made. In consideration of the
     settlement of Allum’s claims alleging violation of his
     civil rights as asserted in Case No. CV-N-94-445 ECR[6]
     and without any other obligation to do so, the Bank
     will pay Allum the gross sum of five hundred thousand
     dollars ($500,000). * * *

The agreement also stated that “As further consideration and

inducement” petitioner would request dismissal of ongoing Nevada

State litigation and Federal litigation between petitioner and

the defendants7 and that “In exchange for the promises contained

in this Agreement” petitioner would generally release all other


     6
      The parties stipulated that the agreement erroneously
refers to case No. CV-N-94-445 ECR and that the correct case
reference is to case No. CV-N-94-455.
     7
      The Nevada litigation consisted of seven “claims and civil
litigation between Allum, the bank, and others before the courts
of the State of Nevada”. The Federal litigation consisted of
nine “claims and civil litigation between Allum, the bank, and
others before the courts of the United States”, in addition to
case No. CV-N-94-455.
                                  -8-

known and unknown claims against the defendants arising out of or

related to his employment relationship with the bank and the

Nevada and Federal litigation.8

     The agreement specifically provided that the bank took no

position on the tax effect of the $500,000 payment to petitioner

and would issue a Form 1099 regarding the payment.   The agreement

also provided that if any governmental authority determined the

payment constituted income, petitioner would be solely

responsible for the payment of all taxes arising from the

determination.   Furthermore, the agreement provided, in regard to

attorney’s fees, that--

     As further mutual consideration of the promises set
     forth herein, the Bank and Allum agree that they are
     each responsible for their own attorneys’ fees and
     costs, and each agrees that they will not seek from the
     other reimbursement for attorneys’ fees and/or costs
     incurred in this action or relating to any matter
     addressed in this Agreement.


     8
      The release of claims provision consisted of both
boilerplate language and, in pertinent part, the following:

     This agreement includes, but is not limited to, (i)
     release, waiver and discharge of any claims, * * *
     damages, or injuries that Allum has pled or otherwise
     claimed, or which Allum could have pled or otherwise
     claimed, in any of the * * * [Nevada and Federal
     litigation], (ii) release, waiver and discharge of any
     claims arising from any statements * * * made or
     distributed or published by any and all of the Released
     Parties, prior to signing of this Agreement by Allum,
     including any statements by Allum himself, and (ii)
     [sic] release of any claims for any type of wages,
     commissions, bonus, separation or severance benefits,
     or any other form of compensation. * * *
                                  -9-

By the end of 1999, the bank had paid petitioner $500,000, and

petitioner had paid Mr. McKenna $75,000 from the amount received.

     Sometime during 1999, petitioner contacted a Nevada

Congressman’s office to inquire about the taxability of the

settlement proceeds and received a response from a representative

of a local Taxpayer Advocate Service office in return.

Petitioner was dissatisfied with the clarity of that office’s

response, and he sent a letter dated January 20, 2000, to the

District Director of the Internal Revenue Service (IRS) in

Phoenix, Arizona, again inquiring about the taxability of the

proceeds he received for violation of his “civil rights to a full

and impartial tribunal”.   On or about February 11, 2000, the

District Director responded by letter to petitioner’s inquiry.

The letter informed petitioner of the rules generally governing

the taxation of court awards and settlements, and stated:

     If this information is insufficient for your needs,
     there are other avenues you can follow to receive a
     more formal opinion on the taxability of the funds
     received in the settlement. You can request an opinion
     letter, private letter ruling, or a determination
     letter. * * * The user fee for a ruling or letter * *
     * would be * * * $2,500, if your total income is over
     $150,000.

Petitioner did not request a ruling or letter.

     On or about April 17, 2000, petitioner filed a Form 1040,

U.S. Individual Income Tax Return, for 1999.   Petitioner did not

include the $500,000 of settlement proceeds in the gross income

he reported on his 1999 return.    Petitioner attached a statement
                                -10-

to his return, however, in which he stated: “I received $500,000

* * * as settlement of a lawsuit for violation of my civil

rights.”

     On January 28, 2003, respondent mailed to petitioner a

notice of deficiency in which respondent increased petitioner’s

gross income for 1999 by the full amount of the settlement

proceeds, including the amount petitioner paid to his attorney.

On February 7, 2003, petitioner’s letter to the Court was filed

as his imperfect petition.    The Court ordered petitioner to file

an amended petition by May 16, 2003.     On May 13, 2003,

petitioner’s amended petition contesting the notice of deficiency

was filed.

                               OPINION

     In general, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer bears the burden of proving

otherwise.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).    In this case, petitioner does not contend that section

7491(a), which shifts the burden of proof to the Commissioner if

its requirements are met, applies, and petitioner has not

produced evidence to show he meets the requirements of section

7491(a).    The burden of proof, therefore, remains on petitioner.

A.   Section 104(a)(2)

     Section 61(a) includes in gross income “all income from

whatever source derived” unless excluded by a specific provision
                                 -11-

of the Code.   This statute is construed broadly, whereas

exclusions from gross income are construed narrowly.

Commissioner v. Schleier, 515 U.S. 323, 328 (1995); United States

v. Burke, 504 U.S. 229, 233 (1992); Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 431 (1955).    Section 104(a)(2) excludes

from gross income “the amount of any damages (other than punitive

damages) received (whether by suit or agreement and whether as

lump sums or as periodic payments) on account of personal

physical injuries or physical sickness”.9

     To be eligible for the section 104(a)(2) exclusion, a

taxpayer must demonstrate that (1) the underlying cause of action

giving rise to the recovery is based in tort or tort type rights,

and (2) the damages were received on account of personal physical

injuries or physical sickness.    Commissioner v. Schleier, supra

at 337; Prasil v. Commissioner, T.C. Memo. 2003-100.    In the

context of section 104(a)(2), the terms “physical injury” and

“physical sickness” do not include emotional distress, except to


     9
      The Small Business Job Protection Act of 1996 (SBJPA), Pub.
L. 104-188, sec. 1605, 110 Stat. 1838, amended sec. 104(a)(2) to
narrow the exclusion for damages received for personal injuries
or sickness to damages for personal injury or sickness that is
physical in nature, effective for amounts received after Aug. 20,
1996. See United States v. Burke, 504 U.S. 229, 236 n.6 (1992)
(preamendment personal injuries or sickness did not include
damages pursuant to the settlement of purely economic rights, but
did include “nonphysical injuries to the individual, such as
those affecting emotion, reputation, or character”). SBJPA also
amended sec. 104(a)(2) to except punitive damages from the
exclusion irrespective of whether they derived from a case
involving physical or nonphysical injury.
                                -12-

the extent of damages not in excess of the amount paid for

medical care described in section 213(d)(1)(A) and (B)

attributable to emotional distress.    See sec. 104(a) (flush

language).

     When damages are received pursuant to a settlement

agreement, the nature of the claim that was the actual basis for

settlement, and not the validity of the claim, controls whether

such amount is excludable under section 104(a)(2).    United States

v. Burke, supra at 237; see also Bagley v. Commissioner, 105 T.C.

396, 406 (1995) (“[T]he critical question is, in lieu of what was

the settlement amount paid?”), affd. 121 F.3d 393 (8th Cir.

1997).   The determination of the nature of the claim is a factual

inquiry and is generally made by reference to the settlement

agreement.    Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part and revd. in part on another issue 70 F.3d 34 (5th

Cir. 1995).   An express allocation in the settlement agreement of

a portion of the proceeds to tort or tortlike claims is generally

binding for tax purposes if the agreement was entered into by the

parties in an adversarial relationship at arm’s length and in

good faith.    Bagley v. Commissioner, supra at 406; Robinson v.

Commissioner, supra at 126-127.   If the settlement agreement

lacks express language stating what the settlement amount was

paid to settle, we look to the intent of the payor, based on all

the facts and circumstances of the case, including the complaint
                              -13-

that was filed and the details surrounding the litigation.

Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965),

affg. T.C. Memo. 1964-33; Robinson v. Commissioner, supra at 127.

     1.   The Parties’ Contentions

     Respondent concedes that petitioner satisfies the first

requirement for exclusion under section 104(a)(2).   Respondent

contends, however, that petitioner does not satisfy the second

requirement for exclusion because the settlement proceeds were

not received on account of personal physical injury or physical

sickness, regardless of whether “petitioner’s reporting his

suspicions to banking authorities, his termination or the alleged

violation of his procedural and substantive due process rights

gave rise to the recovery of the settlement proceeds”.

     Petitioner contends that although the “crux of the cases,

which were settled, was that the Nevada Supreme Court, through

its members, utilized it [sic] power * * * to violate Allum’s

constitutional rights to a fair and impartial tribunal and to

violate the Nevada and Federal Rules of Civil Procedure”, he

received the settlement funds because he had been labeled a RICO

scheme participant by the Nevada Supreme Court and had lost his

FHA underwriting license (license).   Petitioner further contends

that because he has a property interest in his license, the

alleged loss of the license constitutes a personal physical

injury for purposes of section 104(a)(2).
                               -14-

     2.   Analysis

     Because the settlement payment was made pursuant to the

agreement between petitioner and the bank, we look first to the

agreement’s terms in order to determine whether the payment is

attributable to a personal physical injury.   The agreement

provided that the settlement amount is payable to petitioner in

consideration of the settlement of petitioner’s “civil rights

claims” in case No. CV-N-94-455.   The agreement also required

petitioner to release or request dismissal of all of his known

and unknown claims against the defendants arising out of both his

employment relationship with the bank and his State and Federal

court claims and litigation as additional consideration for the

settlement.   The agreement, however, did not allocate any part of

the settlement amount to a personal physical injury or refer to a

personal physical injury resulting from any civil rights

violations or generally released claims.   Rather, the agreement

expressly provided that the settlement amount was to be reported

to the IRS on a Form 1099 and was potentially taxable.

     Because we cannot clearly discern from the agreement why the

settlement amount was paid, we must also look to the allegations

in petitioner’s complaint to determine whether the “civil rights

claims” to which the proceeds are allocated are claims for

personal physical injuries.   See Robinson v. Commissioner, supra

at 127 (when payments are received pursuant to a settlement
                               -15-

agreement from which we cannot clearly discern why the payments

were made, the underlying complaint is normally examined as an

indicator of the payor’s intent).     Petitioner alleges in his

complaint that his civil rights were violated because his

procedural and substantive due process rights were infringed.     In

essence, he claims his due process rights were violated through

judicial misconduct done in furtherance of Nevada’s “good ole

boy” network.   Although the complaint also includes general

allegations that he suffered emotional and physical damage as a

result of the alleged violations and seeks compensatory and

punitive damages, it contains no specific allegations of personal

physical injury or physical sickness.10

     Neither the settlement agreement nor the complaint

establishes that the bank made any portion of the settlement

payment to petitioner on account of a personal physical injury or

physical sickness.   The agreement and complaint only indicate

that the bank made the payment on account of civil rights

violations and for a general release from all of petitioner’s

claims.




     10
      The mere mention of “personal physical injury” in a
complaint does not, by itself, serve to exclude the recovery from
gross income under sec. 104(a)(2) because the “personal physical
injury” language could easily be included in every complaint,
even if such claim were only a “throwaway” claim. See
Kightlinger v. Commissioner, T.C. Memo. 1998-357.
                                -16-

     Petitioner nevertheless argues that the bank made the

settlement payment as a result of the alleged loss of his license

and that such loss is a personal physical injury under section

104(a)(2) so that the settlement proceeds are excludable in their

entirety.   This argument, however, is unsupported by the record

in this case for several reasons.      First, the agreement makes no

specific allocation of proceeds to the alleged loss of the

license.    Second, although petitioner’s complaint alleges that

petitioner was falsely labeled a participant in a RICO scheme,

the complaint does not allege petitioner lost his license as a

result.    Third, in March 1998, the Court of Appeals for the Ninth

Circuit found that petitioner had not proved that he had been

deprived of his license by the defendants, making it highly

unlikely that the bank would offer petitioner $500,000 for the

alleged loss of the license more than a year later.

     Even if we assumed, for purposes of argument, that the bank

made the settlement payment on account of the alleged loss of

petitioner’s license, this fact would not support petitioner’s

argument.   Petitioner’s interest in his license is a property

interest, and recovery for “business or property” is separate and

distinct from recovery for personal injury.      Berg v. First State

Ins. Co., 915 F.2d 460, 464 (9th Cir. 1990); Mishler v. Nev.

State Bd. of Med. Examrs., 896 F.2d 408, 409-410 (9th Cir. 1990);

Rylewicz v. Beaton Servs., Ltd., 888 F.2d 1175, 1180 (7th Cir.
                               -17-

1989); Kightlinger v. Commissioner, T.C. Memo. 1998-357 (citing

Genty v. Resolution Trust Corporation, 937 F.2d 899, 918 (3d Cir.

1991)).

     3.   Conclusion

     The agreement did not allocate any part of the settlement

payment to any personal physical injury or physical sickness

involving petitioner, and the other evidence in the record does

not support such an allocation.   Accordingly, we conclude that no

portion of the $500,000 settlement payment was compensation for a

personal physical injury or physical sickness and that petitioner

is not entitled to exclude the payment from gross income under

section 104(a)(2).

     4.   Petitioner’s Additional Arguments

          a.   Constitutionality of Section 104(a)(2)

     Alternatively, petitioner contends that section 104(a)(2)

does not apply to his settlement proceeds because it is

unconstitutionally vague.   Petitioner argues that the local

Taxpayer Advocate Service office’s inability to give a

“definitive answer” to his initial inquiry regarding the

applicability of section 104(a)(2) provides “prima facia evidence

that the IRS, the agency to enforce the statute, does not know

what is included or excluded as taxable or non-taxable income.”

     Section 104(a)(2) provides that the amount of any damages,

other than punitive damages, received by suit or agreement “on
                                -18-

account of personal physical injuries or physical sickness” is

excludable from gross income.   The language of the statute is not

vague or ambiguous such that “men of common intelligence must

necessarily guess at its meaning”.     Baggett v. Bullitt, 377 U.S.

360, 367 (1964); Connally v. Gen. Constr. Co., 269 U.S. 385, 391

(1926); see also Retired Teachers Legal Def. Fund, Inc. v.

Commissioner, 78 T.C. 280, 285 (1982).    Moreover, the IRS

specifically offered petitioner a more formal opinion on the

taxability of his settlement, which petitioner refused, and

postamendment section 104(a)(2) has been applied in numerous

opinions with no mention of any concern about vagueness.11     See,

e.g., Ndirika v. Commissioner, T.C. Memo. 2004-250; Lindsey v.

Commissioner, T.C. Memo. 2004-113; Tamberella v. Commissioner,

T.C. Memo. 2004-47; Amos v. Commissioner, T.C. Memo. 2003-329;

Shaltz v. Commissioner, T.C. Memo. 2003-173.    Although the

standard established in section 104(a)(2) may be difficult to

apply to particular factual circumstances, this fact does not

render the statute vague or ambiguous and does not persuade us to



     11
      When other constitutional challenges have been raised
against sec. 104(a)(2), the statute consistently has been upheld.
See, e.g., Polone v. Commissioner, T.C. Memo. 2003-339
(postamendment sec. 104 is not unconstitutionally retroactive);
Venable v. Commissioner, T.C. Memo. 2003-240 (postamendment sec.
104 is neither retroactive nor unconstitutional), affd. 110 Fed.
Appx. 421 (5th Cir. 2004); see also Young v. United States, 332
F.3d 893 (6th Cir. 2003) (the distinction in postamendment sec.
104(a)(2) between physical and nonphysical injury does not
violate the Equal Protection Clause of the Fifth Amend.).
                                 -19-

find section 104(a)(2) unconstitutional.   See Cottrell v.

Commissioner, T.C. Memo. 1970-218.

          b.   Capital Investment

     Petitioner argues that the settlement proceeds are “not only

for ‘personal physical injury’” but are also a nontaxable return

on capital because they are allocable to the loss of his license

as the source of his business and to the loss of goodwill he

generated in being known for his honesty and trustworthiness.

See, e.g., OKC Corp. & Subs. v. Commissioner, 82 T.C. 638, 650

(1984) (settlement proceeds may be received as a replacement for

capital destroyed or for the sale or exchange of a capital asset

so that they are treated as a nontaxable return of capital or a

taxable capital gain, respectively).

     The record contains no credible evidence that the bank made

any portion of the settlement payment for petitioner’s alleged

loss of license or goodwill, and petitioner has otherwise failed

to show that the settlement proceeds, in whole or in part, are

attributable to the damage of any capital asset.   Consequently,

we reject petitioner’s argument.

B.   Attorney’s Fees and Costs

     1.   Commissioner v. Banks

     In Commissioner v. Banks, 543 U.S. ___, 125 S. Ct. 826

(2005), the U.S. Supreme Court addressed whether the portion of a

money judgment or settlement paid to a plaintiff’s attorney under
                                -20-

a contingent fee agreement was includable in the plaintiff’s

gross income.    The Supreme Court held that a contingent fee

agreement between an attorney and a client should be viewed as an

anticipatory assignment to the attorney of a portion of the

client’s income from any litigation recovery12 and that, “as a

general rule, when a litigant’s recovery constitutes income, the

litigant’s income includes the portion of the recovery paid to

the attorney as a contingent fee.”     Id. at ___, ___, 125 S. Ct.

at 829, 831.    The Supreme Court’s holding is consistent with

prior opinions of this Court holding that the portion of a

recovery paid to an attorney as a contingent fee is includable in

the litigant’s income.    See Kenseth v. Commissioner, 114 T.C. 399

(2000), affd. 259 F.3d 881 (7th Cir. 2001); O’Brien v.

Commissioner, 38 T.C. 707, 712 (1962), affd. per curiam 319 F.2d

532 (3d Cir. 1963).

     2.   The Parties’ Contentions

     Petitioner argues that the portion of the settlement amount

used to pay his attorney’s fees is not includable in his gross


     12
      Under the anticipatory assignment of income doctrine, a
taxpayer cannot exclude an economic gain from gross income by
assigning the gain in advance to another party. Commissioner v.
Banks, 543 U.S. ___, ___, 125 S. Ct. 826, 831 (2005). The
rationale for this doctrine is that “gains should be taxed ‘to
those who earn them’, a maxim we have called ‘the first principle
of income taxation’”. Id. at ___, 125 S. Ct. at 831 (citations
omitted). In order to preserve this principle, when income is
anticipatorily assigned it is attributed to the taxpayer who
retains dominion over the income-generating asset. Id. at ___,
125 S. Ct. at 831-832.
                              -21-

income because the nature of his relationship with the

defendants, the nature of his underlying claims, and the

retention of his attorney “for the sole purpose of culminating

the settlement agreement” distinguish his case from Commissioner

v. Banks, supra; and his relationship with his attorney

constituted a “de facto subchapter K partnership”.13   Respondent

contends that Banks is controlling and that the portion of the

settlement amount used to pay petitioner’s attorney’s fees must

be included in petitioner’s gross income.   Respondent concedes

that petitioner may deduct the amount of the attorney’s fees as a

miscellaneous itemized deduction subject to the restrictions of

sections 67 and 68 and the alternative minimum tax provisions.

We agree with respondent.



     13
      Petitioner also contends that “If any tax is determined to
be due”, the filing fees, discovery fees, and supply costs he
allegedly incurred in pursuing his claims against the bank
“should be excluded as costs of producing the taxable income.”
We interpret this as petitioner’s argument that the fees and
costs are deductible as expenses paid or incurred for the
production of income under sec. 212(1). Deductions are strictly
a matter of legislative grace, and petitioner must show that his
deductions are allowed by the Internal Revenue Code. Rule
142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Petitioner must also keep sufficient records to
substantiate any deductions otherwise allowed by the Internal
Revenue Code. Sec. 6001; see New Colonial Ice Co. v. Helvering,
supra at 440. Petitioner provided no evidence regarding any of
the alleged fees and costs other than his own vague testimony.
In the absence of corroborating evidence, we are not required to
accept petitioner’s self-serving testimony. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). Because petitioner has
failed to substantiate the fees and costs, he is not entitled to
deduct them.
                                 -22-

      3.   Analysis

      In Commissioner v. Banks, supra, the Supreme Court

consolidated the cases of taxpayers John W. Banks II and Sigitas

J. Banaitis.    Mr. Banks had retained an attorney on a contingent

fee basis and had filed a civil suit against his employer

alleging employment discrimination under Federal and State law.

Id. at ___, 125 S. Ct. at 829.    Mr. Banaitis had retained an

attorney on a contingent fee basis and had filed a civil suit

against his employer alleging willful interference with his

employment contract and wrongful termination.    Id. at ___, 125 S.

Ct. at 830.    Both taxpayers settled their claims, and neither

taxpayer included the amount of settlement proceeds paid to his

attorney in his gross income.    Id. at ___, 125 S. Ct. at 829-830.

The Commissioner issued to each taxpayer a notice of deficiency

in which the Commissioner determined that the amount paid to the

taxpayer’s attorney as a contingent fee was includable in the

taxpayer’s income, and each taxpayer contested the determination.

Id.   Relying on the facts that the taxpayers retained control

over their legal claims (income-generating assets), diverted some

of the settlement amount to their attorneys through their

respective contingent fee agreements, and realized a consequent

benefit, the Supreme Court decided that each taxpayer must

include in his gross income the portion of the settlement amount
                                 -23-

paid to his attorney under the contingent fee agreement.       Id. at

___, ___, ___, 125 S. Ct. at 828-829, 832, 834.

     In arriving at its decision, the Supreme Court rejected the

taxpayers’ argument that a contingent fee agreement establishes,

for tax purposes, a joint venture or partnership “in which the

client and attorney combine their respective assets--the client’s

claim and the attorney’s skill--and apportion any resulting

profits.”   Id. at ___, 125 S. Ct. at 832-833.     In rejecting this

argument, the Supreme Court reasoned that “regardless of the

variations in particular compensation agreements or the amount of

skill and effort the attorney contributes,” the relationship

between a client and his attorney is a “quintessential principal-

agent relationship” because the client retains ultimate dominion

and control over the underlying claim, and the attorney is

dutybound to act only in the interests of the client.       Id. at

___, ___, 125 S. Ct. at 832, 833.       The Supreme Court further held

that the client may not exclude litigation proceeds used to pay

attorney’s fees from his gross income, even when the attorney-

client contract or State law confers special rights or

protections on the attorney, including providing the attorney

with an “ownership interest” in his fees, so long as these

protections do not alter the fundamental principal-agent

character of the relationship.    Id. at ___, 125 S. Ct. at 833.

The Supreme Court declined to address whether a contingent fee
                                -24-

agreement established a “Subchapter K partnership”, however,

because the “novel [proposition] of law with broad implications

for the tax system” was not advanced at an earlier stage of the

litigation.    Commissioner v. Banks, 543 U.S. at ___, 125 S. Ct.

at 833.

          a.     Petitioner’s Argument That Banks Is
                 Distinguishable

     In this case, petitioner hired an attorney to represent him

in the settlement of his legal claims against the defendants on a

contingent fee basis, received a settlement amount from the

defendants, failed to include the settlement amount, including

the portion paid to his attorney, in his gross income, and was

issued a notice of deficiency by respondent.   This is precisely

the type of situation the Supreme Court considered in Banks.     We

therefore reject petitioner’s contention that Banks is not

controlling because the type of facts on which he relies to

distinguish his case--the nature of his relationship with the

defendants and his underlying claims,14 and what he terms his


     14
      The Supreme Court did consider the fact that Mr. Banks
brought his legal claims under Federal statutes authorizing fee
awards to prevailing plaintiff’s attorneys due to Mr. Banks’
contention that the application of the anticipatory assignment of
income principle would be inconsistent with the purpose of
statutory fee-shifting provisions. Commissioner v. Banks, 543
U.S. at ___, 125 S. Ct. at 834. Because Mr. Banks ultimately
settled his claims and his attorney received his fee pursuant to
their contingent fee arrangement rather than a statutory fee-
shifting provision, however, the Supreme Court did not address
this contention. Id. Petitioner has not asserted a similar
                                                   (continued...)
                               -25-

“one event relationship” with his attorney--provide no meaningful

distinction from Banks.

          b.    Petitioner’s Subchapter K Partnership Argument

     Petitioner also contends that the portion of the settlement

amount used to pay his attorney’s fees is not includable in his

gross income because a de facto subchapter K partnership existed

between petitioner and his attorney.   Petitioner argues that he

combined his rights in his settlement recovery with his

attorney’s professional license, that “The gross income produced

by the partnership (settlement monies from the defendants) could

not have occurred without the partnership”, and that the

relationship between petitioner and his attorney “is analogous to

the horse owner and trainer in McDougal v. Commissioner, 62 T.C.

720 (1974) in which the court determined that a joint venture

resulted.”   We reject petitioner’s attempt to avoid Federal

income taxation of the portion of the settlement amount he paid

to his attorney by labeling his relationship with his attorney a

subchapter K partnership.




     14
      (...continued)
contention in this case.
                                -26-

     The substantive law governing the Federal income taxation of

partners and partnerships is found in subchapter K (sections 701

through 777) of the Code.15   See Rhone-Poulenc Surfactants &

Specialties, L.P. v. Commissioner, 114 T.C. 533, 539 (2000).    An

entity that meets the definition of partnership provided by

section 761(a)--“a syndicate, group, pool, joint venture or other

unincorporated organization through or by means of which any

business, financial operation, or venture is carried on, and

which is not * * * a corporation or a trust or estate”--is thus

subject to the provisions of subchapter K.16   See sec. 1.761-1,


     15
      A joint venture or other contractual arrangement may
create a separate entity for Federal tax purposes if the
participants carry on a trade, business, financial operation, or
joint venture and divide the profits therefrom. Sec. 301.7701-
1(a)(2), Proced. & Admin. Regs. An eligible domestic business
entity with two or more members will be classified for Federal
tax purposes as a partnership unless it elects to be classified
as a corporation. See sec. 301.7701-2(a), Proced. & Admin. Regs.
(defining “business entity” as “any entity recognized for federal
tax purposes * * * that is not properly classified as a trust
under §301.7701-4 or otherwise subject to special treatment under
the Internal Revenue Code”); see also sec. 301.7701-3(a) and (b),
Proced. & Admin. Regs. Whether an organization is an entity
separate from its owners for Federal tax purposes is a matter of
Federal tax law and does not depend on whether the organization
is recognized as an entity under local law. Sec. 301.7701-
1(a)(1), Proced. & Admin. Regs.
     16
      Sec. 761(a) also provides that the members of an
unincorporated organization may elect to exclude such
organization from the application of all or part of subch. K if
it is availed of (1) for investment purposes only and not for the
active conduct of a business, (2) for the joint production,
extraction, or use of property, but not for the purpose of
selling services or property produced or extracted, or (3) by
dealers in securities for a short period for the purpose of
                                                   (continued...)
                               -27-

Income Tax Regs.; see also sec. 7701(a)(2) (providing the same

definition of “partnership” as section 761(a) for purposes of the

Code); secs. 301.7701-1, 301.7701-2, and 301.7701-3, Proced. &

Admin. Regs.

     In order to determine whether a partnership exists for

Federal income tax purposes, and is thereby subject to the

provisions of subchapter K, the Court must consider whether, in

light of all the facts, the parties in good faith and acting with

a business purpose intended to join together in the present

conduct of an enterprise.   Commissioner v. Culbertson, 337 U.S.

733, 743 (1949).   Factors the Court may consider in making this

determination include the agreement, the conduct of the parties

in execution of its provisions, their statements, the testimony

of disinterested persons, the relationship of the parties, their

respective abilities and capital contributions, the actual


     16
      (...continued)
underwriting, selling, or distributing a particular issue of
securities, if the income of the members of the organization may
be adequately determined without computation of partnership
income. Such electing organizations are still considered
partnerships for purposes of the other sections of the Code,
however. Bryant v. Commissioner, 46 T.C. 848, 864 (1966) (“The
election under section 761(a) does not operate to change the
nature of the entity. * * * The partnership remains intact and
other sections of the Code are applicable as if no exclusion
existed.”), affd. 399 F.2d 800 (5th Cir. 1968). Subch. K,
therefore, governs the Federal income tax treatment of an entity
qualifying as a partnership under secs. 761(a) and 7701(a)(2),
and their accompanying regulations, unless it is an entity
specifically enumerated in sec. 761(a) that is eligible to elect
out of subch. K treatment and does so.
                               -28-

control of income and the purposes for which it is used, and any

other facts throwing light on their true intent.   Id. at 742; see

also Luna v. Commissioner, 42 T.C. 1067, 1077-1078 (1964) (other

factors to consider include whether each party was a principal

and coproprietor, or whether one party was the agent or employee

of the other, receiving for his services contingent compensation

in the form of a percentage of income; whether the parties filed

Federal partnership returns or otherwise represented to

respondent or to persons with whom they dealt that they were

joint venturers; and whether the parties exercised mutual control

over and assumed mutual responsibilities for the enterprise).

     The record in this case does not support petitioner’s

contention that a subchapter K partnership existed, for several

reasons.   First, petitioner produced no evidence that he intended

to form a partnership with his attorney.   The record contains

only an argument, made for the first time on brief, that a de

facto subchapter K partnership “existed” because of the

combination of his interest in his legal claims and his

attorney’s professional license.   Second, contrary to the

position he advocated on brief, petitioner both testified at

trial and submitted to the Court as a stipulation of fact that he

“hired” his attorney “to represent him” in the settlement of his

legal claims and paid him for “services he rendered”,

demonstrating that petitioner did not view his attorney as a
                               -29-

coowner of his legal claims, but as a legal representative

receiving compensation for his services.     See Kessler v.

Commissioner, T.C. Memo. 1982-432 (merely providing compensation

to an employee or independent contractor on a contingent fee

basis, as is common among attorneys, does not convert the

relationship to a partnership for Federal tax purposes); see also

Smith v. Commissioner, 33 T.C. 465, 487 (1959), affd. in part,

revd. in part and remanded on another issue 313 F.2d 724 (8th

Cir. 1963); Comtek Expositions, Inc. v. Commissioner, T.C. Memo.

2003-135, affd. 99 Fed. Appx. 343 (2d Cir. 2004).    Third,

petitioner produced no evidence regarding whether the attorney

intended to form a partnership with him.    It is well established

that the failure of a party to introduce evidence which, if true,

would be favorable to him, gives rise to the presumption that the

evidence would be unfavorable if produced.     Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162

F.2d 513 (10th Cir. 1947).

     Furthermore, the record demonstrates that petitioner’s

reliance on McDougal v. Commissioner, 62 T.C. 720 (1974), is

misplaced.   In McDougal, we determined whether the taxpayer’s

transfer of a one-half interest in a racehorse to a horse trainer

constituted a contribution to a partnership or joint venture

formed by the taxpayer and trainer.   Id.    The taxpayer had

purchased the horse on the trainer’s advice, and he promised the
                                 -30-

trainer a one-half interest in the animal once he had recovered

acquisition costs and expenses.     Id. at 721.   The taxpayer did

not make the promise in lieu of payment of the standard trainer’s

fee, however, and continued to compensate the trainer for the

services he provided in relation to the horse until the time of

the transfer.     After the transfer, the taxpayer and the trainer

made joint decisions regarding the horse, created a partnership

agreement, agreed to share profits equally, computed what the

partnership’s tax return would show (although they did not file a

partnership return for the year in issue), and reported the

results of the computation on their individual returns.      Id. at

722, 723.   Because of the presence of all of these factors, we

found that the taxpayer and the trainer had formed a joint

venture.    Id. at 725.   McDougal, therefore, is distinguishable

from this case because there is no evidence petitioner and his

attorney agreed to form a partnership, shared control over

petitioner’s legal claims, considered their relationship a

separate entity for tax purposes or treated it as such, or

considered the attorney’s fees to be anything other than

compensation for services.     Consequently, we reject petitioner’s

contention.

C.   Conclusion

     Because the Supreme Court’s opinion in Commissioner v.

Banks, 543 U.S. ___, 125 S. Ct. 826 (2005), is controlling, we
                                 -31-

hold that the entire settlement amount, including the portion

petitioner paid to his attorney pursuant to a contingent fee

agreement, must be included in petitioner’s gross income.      See

Helvering v. Horst, 311 U.S. 112 (1940); Lucas v. Earl, 281 U.S.

111 (1930).   We have carefully considered all remaining arguments

made by the parties for results contrary to those expressed

herein and, to the extent not discussed above, conclude that

those arguments are without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        under Rule 155.
