                           T.C. Memo. 2000-180



                         UNITED STATES TAX COURT



               NANCY J. HUKKANEN-CAMPBELL, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12371-98.                          Filed June 12, 2000.



     Robert J. Rayburn, III, for petitioner.

     Douglas S. Polsky, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

        GERBER, Judge:   In a notice of deficiency addressed to

petitioner, respondent determined a deficiency of $17,402 in

petitioner’s Federal income tax for the year ended December 31,

1993.     The issues for our consideration are:     (1) Whether

petitioner’s $150,000 judgment received in an action under the

pre-1991 title VII of the Civil Rights Act of 1964, Pub. L. 88-
                              - 2 -


352, 78 Stat. 241 (title VII), is excludable from gross income

under section 104(a)(2); and (2) if the title VII proceeds are

includable in income, whether petitioner is entitled to exclude

from gross income that portion of the proceeds paid as attorney’s

fees under her contingent fee retainer agreement.

                        FINDINGS OF FACT1

     The facts in this case have been fully stipulated, and the

case was submitted to the Court under Rule 122.2    Petitioner

resided in Shawnee, Kansas, at the time her petition was filed in

this case.

     Petitioner was employed at the International Union of

Operating Engineers, Hoisting and Portable Local No. 101 (Local

101) from July 10, 1978, to October 29, 1984.   On May 23, 1990,

petitioner filed a Complaint in the U.S. District Court for the

Western District of Missouri, Western Division, against Local 101

and against Sam F. Long (Long), the Chief Executive Officer of

Local 101 during petitioner’s employment.   Petitioner’s Complaint

contained the allegation that, in 1984, she was constructively

discharged in violation of title VII.   Petitioner sought




     1
       The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
     2
       Unless otherwise indicated, Rule references are to this
Court’s Rules of Practice and Procedure, and section references
are to the Internal Revenue Code in effect for the taxable year
in question.
                               - 3 -


injunctive relief, backpay, front pay (the monetary equivalent of

reinstatement), benefits, attorney’s fees, and reasonable costs.

     The District Court ruled in favor of petitioner and found

that petitioner had been subjected to unwelcome sexual harassment

based on petitioner’s gender and that such harassment was

sufficiently severe and pervasive so as to unreasonably interfere

with her work performance and create an intimidating, hostile,

and offensive work environment.   The District Court entered a

Final Judgment on April 3, 1992, awarding petitioner $52,492 in

backpay, $44,418.06 in front pay, $82,534.81 in pension benefits,

$85,227.50 in attorney’s fees, and $1,016.90 in reasonable costs.

Local 101 and Long appealed, and petitioner cross-appealed, to

the U.S. Court of Appeals for the Eighth Circuit.   The Court of

Appeals upheld the backpay, front pay, and pension benefits, and

remanded the attorney’s fees award to the District Court for

further consideration.   See Hukkanen v. International Union of

Operating Engrs., Hoisting & Portable Local No. 101, 3 F.3d 281

(8th Cir. 1993).

     In connection with petitioner’s lawsuit, petitioner and her

attorneys entered into a Contract for Employment for Litigation

on a Contingency Fee Basis (contingency fee contract).   The

contingency fee contract provided that petitioner’s attorneys

would receive 45 percent of the total recovery, including

attorney’s fees, or $125 per hour for all time from the beginning
                                - 4 -


of the case to completion, or the court-awarded fee, whichever

figure was greater, plus any expenses that were not paid by

petitioner.   In no event, however, was petitioner to receive less

than 25 percent of the combined award of attorney’s fees and

client award after deduction of expenses.

     On December 21, 1993, Local 101 paid petitioner $150,000 in

partial satisfaction of the title VII judgment.   The payment was

made jointly to petitioner and her attorneys.   Ultimately,

$76,600.75 was retained by petitioner, and $73,399.25, as legal

fees, was retained by petitioner’s attorneys.

     Petitioner timely filed her Federal income tax return for

the 1993 taxable year (1993 original return) and reported the

entire $150,000 judgment as “Other income” and reported the

$73,399.25 in attorney’s fees as a miscellaneous itemized

deduction.    In 1995, petitioner filed an Amended U.S. Individual

Income Tax Return, Form 1040X, for the 1993 taxable year,

excluding the $150,000 judgment from income, thereby eliminating

the need to claim the $73,399.25 in attorney’s fees.   As a

result, petitioner reported that her corrected tax liability was

$437, that she had paid $20,512, and that she was entitled to a

refund of $20,075.

                               OPINION

     Respondent determined that petitioner’s 1993 gross income

included the $150,000 award.   Respondent also determined that
                                - 5 -


petitioner’s legal fees and costs totaling $73,399.25 were

deductible as a miscellaneous itemized deduction, subject to the

2-percent floor under section 67.    Respondent did not allow the

miscellaneous itemized deduction for legal fees in computing

petitioner’s alternative minimum taxable income.    Thus, under

respondent’s determination, petitioner would be subject to

alternative minimum tax (AMT), under sections 55 and 56, of

$17,402.    Petitioner contends that the $150,000 award is

excludable from income, or alternatively, if the award is not

excludable, the portion of the award paid as attorney’s fees is

excludable from income, and petitioner is not liable for AMT.

Excludability of Title VII Judgment Proceeds

     We must first decide whether petitioner’s title VII judgment

proceeds are excludable from gross income.    Except as otherwise

provided, gross income includes income from all sources.     See

sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426

(1955).    Although section 61(a), concerning the inclusion of

income, has been broadly construed, statutory exclusions from

income have been more narrowly construed.    See Commissioner v.

Schleier, 515 U.S. 323, 327-328 (1995); Kovacs v. Commissioner,

100 T.C. 124, 128 (1993), affd. without published opinion 25 F.3d

1048 (6th Cir. 1994).

     One such statutory exclusion appears in section 104(a)(2).

Under section 104(a)(2), gross income does not include “the
                               - 6 -


amount of any damages received (whether by suit or agreement and

whether as lump sums or as periodic payments) on account of

personal injuries or sickness”.   The regulations provide that

     The term “damages received (whether by suit   or
     agreement)” means an amount received (other   than
     workmen’s compensation) through prosecution   of a legal
     suit or action based upon tort or tort type   rights, or
     through a settlement agreement entered into   in lieu of
     such prosecution.

Sec. 1.104-1(c), Income Tax Regs.   Thus, damages may be excluded

from gross income only if petitioner shows that (1) the

underlying cause of action giving rise to the recovery is based

upon tort or tort type rights, and (2) the damages were received

on account of personal injuries or sickness.   See Commissioner v.

Schleier, supra at 336-337; Wesson v. United States, 48 F.3d 894,

901-902 (5th Cir. 1995); Bagley v. Commissioner, 105 T.C. 396,

416 (1995), affd. 121 F.3d 393 (8th Cir. 1997).

     When damages are received pursuant to a suit or settlement

agreement, the nature of the underlying claim determines whether

such damages are excludable under section 104(a)(2).    See United

States v. Burke, 504 U.S. 229 (1992); Thompson v. Commissioner,

866 F.2d 709, 711 (4th Cir. 1989), affg. 89 T.C. 632 (1987);

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

part, revd. in part, and remanded on another ground 70 F.3d 34

(5th Cir. 1995).   Determining the nature of the claim is a

factual inquiry.   See Bagley v. Commissioner, supra at 406;
                                - 7 -


Stocks v. Commissioner, 98 T.C. 1, 11 (1992).    The claim must be

bona fide, but not necessarily valid.   See Taggi v. United

States, 35 F.3d 93, 96 (2d Cir. 1994); Robinson v. Commissioner,

supra at 126; Stocks v. Commissioner, supra at 10.    The crucial

question is “in lieu of what was the settlement amount paid?”

Bagley v. Commissioner, supra at 406.

     In United States v. Burke, supra, the taxpayers brought a

sex discrimination claim under title VII against their employer.

The parties subsequently settled the case, and the employer

withheld Federal income taxes on the settlement received by the

taxpayers.   The taxpayers sought refunds of the withheld taxes on

the ground that the settlement was excludable under section

104(a)(2) as “‘damages received * * * on account of personal

injuries or sickness.’”   Id. at 232 (quoting section 104(a)(2)).

     The Supreme Court held that the nature of the claim

underlying the taxpayers’ settlement determined the excludability

of the settlement under section 104(a)(2).   See id. at 237.    The

Court noted that title VII focused on “‘legal injuries of an

economic character’” and limited the available remedy to backpay

awards and injunctive relief.    Id. at 238-239 (quoting Albemarle

Paper Co. v. Moody, 422 U.S. 405, 418 (1975)).   The Court further

stated:

     Nothing in this remedial scheme purports to recompense
     a Title VII plaintiff for any of the other traditional
     harms associated with personal injury, such as pain and
                                  - 8 -

     suffering, emotional distress, harm to reputation, or
     other consequential damages * * *.

Id. at 239.    Because the taxpayers’ remedies under title VII were

limited to wages on which they otherwise would have been taxed,

the Court held that title VII’s sole remedial focus was the award

of back wages and did not redress a tortlike personal injury

within the meaning of section 104(a)(2) and the applicable

regulations.    See id. at 241.   As such, the settlements received

by the taxpayers pursuant to their title VII claims were not

excludable from gross income under section 104(a)(2).

     Similar to the taxpayers in United States v. Burke, supra,

petitioner brought a claim under title VII against her employer.

Since the damages available to petitioner as a title VII claimant

consisted only of wages,3 which would otherwise be taxable, the

$150,000 recovery received by petitioner as partial payment of

her title VII judgment does not constitute “damages received * *

* on account of personal injuries”.       Thus, under the reasoning of


     3
       In 1991, the Civil Rights Act, Pub. L. 102-166, 105 Stat.
1071 (1991), expanded the damages available under title VII and
created a right of recovery for compensatory and punitive damages
for certain intentional violations of title VII. In Landgraf v.
USI Film Prods., 511 U.S. 244 (1994), the Supreme Court held that
the 1991 amendments to the Civil Rights Act did not apply
retroactively. Because petitioner’s title VII suit was filed in
1990 and the conduct underlying the suit occurred from 1981 to
1984, the application of sec. 104(a)(2) to any amounts received
from petitioner’s title VII claim must be considered in light of
the Civil Rights Act as it existed prior to the 1991 amendments.
See Clark v. Commissioner, T.C. Memo. 1997-156. In any event,
there is no evidence that petitioner sought in her Complaint or
was awarded damages on account of personal injury.
                               - 9 -

Burke, petitioner’s title VII recovery is not excludable from

gross income under section 104(a)(2).

     Petitioner advances several arguments in support of her

contention that the proceeds received from her title VII claim

are excludable from income.   Petitioner’s first argument draws

upon the reasoning contained in a dissenting view expressed by

Justice O’Connor in United State v. Burke, supra at 249.    That

dissenting view suggests that the focus should be on the broad

policy underlying title VII rather than the possible remedies

available to claimants.   In the dissent, it was also pointed out

that title VII actions did not “fix the character of the right”

that plaintiffs were seeking to enforce.    Trying to capitalize on

that reasoning, petitioner contends that, under the laws of her

State, her suit was based in common-law torts (assault, battery,

sexual assault, and sexual battery).    Although the form of the

title VII relief was denominated as “wages”, petitioner argues

that, in substance, her claim was founded in tort.    We note,

however, that if petitioner had an alternative cause of action

under State law, she chose not to pursue it and, instead, brought

her action under title VII.

     In order to bolster her substance argument, petitioner cites

Central Foundry Co. v. Commissioner, 49 T.C. 234, 251 (1967), and

states that the tax treatment of the result of litigation should

not turn upon which remedy or course of action is selected by the
                                - 10 -

taxpayer.   Central Foundry Co. addressed whether a corporation

could deduct the reimbursement of shareholders’ expenses from a

successful proxy fight as ordinary and necessary business

expenses.   The Court stated that no matter which remedy the

shareholder selected, a derivative action or a proxy contest, it

was the proximate relationship to the corporation and the benefit

to the corporation that determined whether the expenses were

deductible.     Central Foundry Co., however, has not been relied

upon by this Court, or any other court, for guidance in

determining whether recoveries by taxpayers are excludable from

gross income under section 104(a)(2).    Thus, we do not view

Central Foundry Co. as persuasive support for petitioner’s

position that the focus should be on the legislative policy

underlying title VII rather than the possible remedies available

to claimants.

     More important, however, is the fact that the Supreme Court

did not follow the dissent’s view in Burke and held that a claim

under title VII is not based on a “tort or tort type” right,

taking account of the kinds of remedies that may be awarded for

that claim.     United States v. Burke, supra at 234-237.   Because

pre-1991 title VII remedies were limited to backpay and

injunctive relief, the Court held that a sex discrimination claim

did not assert a “tort or tort type” right.    Regardless of

whether petitioner’s claims may have had an analogue at common
                              - 11 -

law, the Supreme Court in Burke looked to the remedy that was

addressed by title VII.

     Petitioner also argues that Burke should be read narrowly to

apply to cases based on economic acts that result predominately

in economic harm.   Petitioner contends that in cases where common

law tort remedies exist, Burke should not apply.     Petitioner, in

an attempt to distinguish Burke, points out that the taxpayers’

sole claim in that case was for damages based on economic rights,

whereas petitioner had a tort claim at common law.    We disagree

with petitioner since the majority opinion in Burke did not

address possibilities outside of title VII.

     More importantly, petitioner’s recovery here was based

entirely on title VII, and no evidence was presented establishing

that petitioner had any other remedies at common law.    Even

assuming petitioner did have other avenues of relief outside

title VII, petitioner chose to file a title VII action and is now

bound by the tax consequences that attach to recoveries under

title VII.   We hold that the proceeds from petitioner’s title VII

award are not excluded from gross income under section 104(a)(2).

Excludability of Attorney’s Fees

     The next issue for our consideration is whether petitioner

is entitled to exclude from her gross income that portion of her

title VII proceeds paid as attorney’s fees.   Petitioner argues

that if section 104(a)(2) does not apply and her title VII
                              - 12 -

judgment proceeds are includable in her 1993 gross income, the

$73,399.25 paid to her attorneys is excludable from her gross

income because it was paid directly to her counsel under a

contingent fee retainer agreement.     We note at the outset that

this Court has, relying on the well-established assignment of

income doctrine, uniformly rejected the contention that taxpayers

may exclude the amount of their legal fees and costs from gross

income.   See Kenseth v. Commissioner, 114 T.C. ___ (2000);

O’Brien v. Commissioner, 38 T.C. 707, 712 (1962), affd. per

curiam 319 F.2d 532 (3d Cir. 1963); Benci-Woodward v.

Commissioner, T.C. Memo. 1998-395.

     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), arguing that, under the “attorney’s lien” rationale, an

attorney’s contingent fee portion of a judgment is not included

in the taxpayer’s income.   In Cotnam, the taxpayer and her

attorneys entered into a contingent fee agreement under which the

attorneys would receive 40 percent of any amount recovered on

behalf of the taxpayer on her claim.     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 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
                               - 13 -

Appeals for the Fifth Circuit concluded that under Alabama State

law (the applicable law in Cotnam) the contingent fee arrangement

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:

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

Cotnam v. Commissioner, supra at 125 n.5 (quoting 46 Ala. Code

sec. 64 (1940)).

     The parties here agree that Missouri law is the applicable

law in this case.   Petitioner argues that the Missouri statute

regarding attorney liens is similar to that of the Alabama

statute quoted above, and therefore Cotnam is applicable here.

We disagree.   In the present case, the applicable Missouri

statute provides as follows:

          The compensation of an attorney or counselor for
     his services is governed by agreement, express or
     implied, which is not restrained by law. From the
     commencement of an action or the service of an answer
     containing a counterclaim, the attorney who appears for
     a party has a lien upon his client’s cause of action or
     counterclaim, which attaches to a verdict, report,
     decision or judgment in his client’s favor, and the
     proceeds thereof in whosesoever hands they may come;
                               - 14 -

     and cannot be affected by any settlement between the
     parties before or after judgment.

Mo. Ann. Stat. sec. 484.130 (West 1987).   This provision stands

in marked contrast to the provision of the Alabama Code relied on

in Cotnam.    Although both provisions give an attorney a lien to

secure his or her compensation, the Missouri 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.

     While we agree with petitioner that Missouri law does

provide attorneys with a lien interest in their client’s cause of

action, we are unable to find, and petitioner fails to cite, any

authority under Missouri law that transfers to the attorneys an

ownership or proprietary interest in their client’s cause of

action.   Rather, the cases that petitioner has cited only allow

attorneys a lien interest, as opposed to an equity or ownership

interest, in their client’s cause of action.   In Missouri,

attorneys do not have the same substantive rights in proceeds

recovered on behalf of their clients as do attorneys in Alabama.

See Mills v. Metropolitan St. Ry. Co., 221 S.W. 1, 4 (Mo. 1920)

(“the cause of action is the property of the client and not the

attorney”).

     The Missouri provision granting a lien interest to secure an

attorney’s compensation is more akin to those attorney lien
                               - 15 -

provisions of States that have been distinguished from the

attorney lien provisions of Alabama.    See Baylin v. Commissioner,

43 F.3d 1451, 1455 (Fed. Cir. 1995) (holding 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); Petersen v. Commissioner, 38 T.C. 137, 151-152

(1962) (holding Nebraska attorney lien statute distinguishable

from Alabama attorney lien statute); Coady v. Commissioner, T.C.

Memo. 1998-291 (Alaska attorney lien statute distinguishable from

Alabama statute).

     Petitioner next contends that Missouri law provides the same

attorney lien priority as does Alabama law.    In Cotnam, the court

interpreted Alabama law as providing an attorney lien with a

superior priority over the defendant’s set-off right against the

plaintiff.   See Cotnam v. Commissioner, supra at 125.    Petitioner

relies on Hillside Enters., Inc. v. Carlisle Corp., 944 F. Supp.

793, 802 (E.D. Mo. 1996), for the proposition that Missouri case

law has recognized the same superior attorney lien priority

concept as stated in Cotnam.   The District Court’s decision in

Hillside, however, was reversed by the Court of Appeals for the

Eighth Circuit in Hillside Enters., Inc. v. Continental Carlisle,

Inc., 147 F.3d 732 (8th Cir. 1998).     In reversing, the Court of

Appeals concluded that the lower court’s holding regarding the
                               - 16 -

attorney lien priority was contrary to Missouri law and that,

under Missouri law, an attorney’s lien on the plaintiff’s

judgment is inferior to the defendant’s right to set off its own

judgment against the plaintiff.   Hillside Enters., Inc. v.

Continental Carlisle, Inc., 147 F.3d at 735.   The fact that

Missouri law subordinates an attorney’s lien to the rights

existing between the parties to the action or proceeding clearly

distinguishes it from the Alabama provision cited in Cotnam where

the lien of an attorney is “superior to all liens but tax liens.”

46 Ala. Code sec. 64 (1940).   Based on the foregoing, we find

petitioner’s case distinguishable from Cotnam and hold that

petitioner’s gross income includes the $73,399.25 of her title

VII proceeds paid to her counsel as attorney’s fees.4

     Petitioner complains that she is not subject to AMT because

the attorney’s fees portion of the judgment is not included in

gross income.   We have held that petitioner’s gross income

includes the portion of her title VII proceeds paid to her

counsel as attorney’s fees, and therefore petitioner’s argument

that she is not subject to AMT is rejected.




     4
       We would reach this same holding irrespective of the
differences between the Missouri and Alabama attorney lien
statutes. See Kenseth v. Commissioner, 114 T.C. ___ (2000)
(majority rejected the reasoning of Cotnam v. Commissioner, 263
F.2d 119 (5th Cir. 1959), affg. in part and revg. in part 28 T.C.
947 (1957)).
                              - 17 -

     Petitioner concedes that if the entire $150,000 award is

included in her gross income, the proper treatment of the

attorney’s fees is as a miscellaneous itemized deduction as

reported on petitioner’s 1993 original return.     Section 162(a)

provides that there “shall be allowed as a deduction all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.     Legal fees

incurred by a taxpayer as an expense of employment are

miscellaneous itemized deductions, subject to the overall

limitation on itemized deductions.     See secs. 67 and 68;

Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995), affg.

T.C. Memo. 1995-51; Bagley v. Commissioner, 105 T.C. at 419.

Accordingly, petitioner’s legal fees are deductible as a

miscellaneous itemized deduction.

     Petitioner does not dispute respondent’s contention that the

treatment of the attorney’s fees as a miscellaneous itemized

deduction triggers the application of the AMT under sections 55

and 56.   Under section 56(b)(1)(A)(i), an individual taxpayer’s

deduction for miscellaneous itemized deductions is not allowed in

computing alternative minimum taxable income.     See Alexander v.

Commissioner, supra at 946-947.     Therefore, petitioner is not

permitted to deduct her attorney’s fees as a miscellaneous

itemized deduction for purposes of computing AMT.
                        - 18 -



To reflect the foregoing,


                            Decision will be entered for

                    respondent.
