           RECOMMENDED FOR FULL-TEXT PUBLICATION
                Pursuant to Sixth Circuit Rule 206                     2    Banks v. Comm’r                     Nos. 01-2171/2177
        ELECTRONIC CITATION: 2003 FED App. 0347P (6th Cir.)
                    File Name: 03a0347p.06                                                _________________
                                                                                               COUNSEL
UNITED STATES COURT OF APPEALS
                                                                       ARGUED: James R. Carty, MECKLER, BULGER &
                  FOR THE SIXTH CIRCUIT                                TILSON, Chicago, Illinois, for Appellant. Kenneth W.
                    _________________                                  Rosenberg, UNITED STATES DEPARTMENT OF
                                                                       JUSTICE, APPELLATE SECTION, TAX DIVISION,
 JOHN W. BANKS , II,           X                                       Washington, D.C., for Appellee. ON BRIEF: James R.
         Petitioner-Appellant, -                                       Carty, MECKLER, BULGER & TILSON, Chicago, Illinois,
                                -                                      Roger J. Jones, Russell R. Young, MAYER, BROWN,
                                -   Nos. 01-2171/2177                  ROWE & MAW, Chicago, Illinois, for Appellant. Richard
           v.                   -                                      Farber, John A. Nolet, UNITED STATES DEPARTMENT
                                 >                                     OF JUSTICE, APPELLATE SECTION, TAX DIVISION,
                                ,                                      Washington, D.C., for Appellee.
 COMMISSIONER OF INTERNAL       -
 REVENUE,                       -                                         CLAY, J., delivered the opinion of the court, in which
        Respondent-Appellee. -                                         LAWSON, D. J., joined. MOORE, J. (pp. 29-30), delivered
                                -                                      a separate opinion concurring in part and dissenting in part.
                               N
      On Appeal from the United States Tax Court.                                         _________________
      No. 18097-97—David Laro, Tax Court Judge.
                                                                                              OPINION
                    Argued: March 12, 2003                                                _________________

            Decided and Filed: September 30, 2003                        CLAY, Circuit Judge. This is a consolidated appeal from
                                                                       a decision of the United States Tax Court. In Case Nos. 01-
 Before: MOORE and CLAY, Circuit Judges; LAWSON,                       2171 and 01-2177, Petitioner John W. Banks, II appeals from
                 District Judge.*                                      the tax court’s decision in favor of the Commissioner of
                                                                       Internal Revenue finding, inter alia, deficiencies in
                                                                       Petitioner’s income tax due for the taxable year 1990 in the
                                                                       amount of $99,068.00. In an accompanying memorandum
                                                                       opinion, the tax court ruled, inter alia, that (1) Petitioner
                                                                       could not exclude from gross income money he received
                                                                       pursuant to an out-of-court settlement, including the portion
                                                                       thereof his attorney had received as a contingency fee; and
                                                                       (2) Petitioner was not entitled to an income tax deduction in
                                                                       the taxable year 1990 for payments made to his former spouse
    *
     The Honorable David M. Lawson, United States District Judge for   as part of their divorce settlement. See Banks v. Comm’r, 81
the Eastern D istrict of M ichigan, sitting by de signation.

                                 1
Nos. 01-2171/2177                      Banks v. Comm’r        3    4       Banks v. Comm’r                             Nos. 01-2171/2177

T.C.M. (CCH) 1219, 2001 WL 196751, 2001 Tax Ct. Memo               abandoned Counts 4, 5, and 6 of the second amended
LEXIS 68 (Feb. 28, 2001). We AFFIRM in part and                    complaint, leaving the remaining claims (by process of
REVERSE in part the tax court’s decision.                          elimination) as Counts 1, 2, and 3, i.e., the violations of Title
                                                                   VII, 42 U.S.C. § 1981, and 42 U.S.C. § 1983. The fact that
             I. FACTUAL BACKGROUND                                 the §§ 1981 and 1983 claims were still being litigated was
                                                                   evidenced elsewhere in the order, both in the “Points of Law”
A. Petitioner’s California Federal Court Lawsuit and               section (where the district court directed the parties to brief
   Settlement                                                      “[t]he elements, standards and burdens of proof relative to”
                                                                   §§ 1981 and 1983 claims) (J.A. at 147-48), and in the
   Petitioner worked as an educational consultant with the         “Disputed Factual Issues” section (which includes the issue
California Department of Education (“CDOE”) from 1972 to           of “[w]hether the defendants acted under color of state law to
1986, when he was terminated. In response to his                   deprive [Petitioner] of his rights, privileges and immunities
termination, Petitioner filed a civil action against the CDOE      secured by the Constitution by engaging in discriminatory
(and various past and present employees therein) in the            practices”).1 (J.A. at 141-42.) Abandoning counts 4, 5, and
federal district court for the Eastern District of California.     6, in itself, did not eliminate any of the forms of relief
Petitioner’s second amended complaint alleged six counts.          Petitioner originally had requested in his second amended
Counts 1, 2, and 3 alleged employment discrimination in            complaint. However, the “Relief Sought” section of the
violation of 42 U.S.C. §§ 1981 and 1983; Title VII of the          pretrial order indicated the following: “[Petitioner] seeks
Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e to        only reinstatement, back pay, and attorneys’ fees.” (J.A. at
2000e-17 (2000); and California Government Code § 12965,           147.) The limitation on relief sought was also confirmed in
respectively. Counts 4, 5, and 6 asserted state law tort claims;   the part of the pretrial order calling for a non-jury trial:
specifically, Count 4 alleged intentional infliction of            “Although plaintiff had heretofore demanded a jury trial, he
emotional distress, and Counts 5 and 6 alleged slander.            concedes that since he now seeks only back pay and equitable
Petitioner’s lawsuit sought general damages, future medical        relief, a jury trial is not appropriate.” (J.A. at 132) (emphasis
and hospital expenses, punitive and exemplary damages, back        added).
pay and related employee benefits, various injunctions, and
attorney’s fees. In bringing the lawsuit Petitioner retained an       Petitioner’s trial commenced, and nine days into the trial,
attorney who agreed to represent Petitioner pursuant to a          at the court’s urging, the parties held a settlement conference.
contingency fee agreement.                                         Testimony at the tax court trial from Petitioner’s attorney in
  Settlement attempts failed, and Petitioner’s case proceeded
toward trial. The district court entered a final pretrial              1
conference order on September 22, 1989. Under the                        The phrasing of this issue fairly represents the language of § 1983,
“Abandoned Issues” section, the pretrial order stated,             which provides that “[e]very person who , under color of any statute,
“[Petitioner] has abandoned all claims for damages relative to     ordinance, regulation, custom, or usage, of any State or Territory or the
                                                                   District of Columbia, subjects, or causes to be subjected, any citizen of the
state tort claims, including a claim for intentional and           United States or other person within the jurisdiction thereof to the
negligent imposition of emotional distress, tortious               deprivation of any rights, privileges, or immunities secured by the
interference with business relations, and defamation.” (J.A.       Constitution and laws, shall be liable to the party injured in an action at
at 148.) Thus, according to the pretrial order, Petitioner         law, suit in equity, or other proper proceeding for redress.” 42 U.S.C.
                                                                   § 1983.
Nos. 01-2171/2177                     Banks v. Comm’r       5    6    Banks v. Comm’r                      Nos. 01-2171/2177

the California federal court action, as well as a letter from    B. Petitioner’s Alimony Payment to His Former Spouse
Petitioner to an Internal Revenue Service (“IRS”) agent,            and Deduction
indicated that Petitioner had initially requested $850,000
during settlement discussions, and that he and his attorney         On November 1, 1984, the marriage of Petitioner and his
had arrived at that proposed settlement figure based on          first wife, Verna Banks, was dissolved. In adjudicating the
Petitioner’s salary. The defendants countered with an offer of   impending dissolution, the California Superior Court issued
$464,000, apparently arguing that Petitioner should take less    an order, dated January 2, 1984, declaring that Verna Banks
money because he could designate the amount as personal          was entitled to 43.95% of Petitioner’s gross monthly military
injury damages and render it non-taxable. Petitioner and his     retirement payments. Pursuant to this order, Petitioner began
attorney agreed to the $464,000 settlement amount, so long as    making payments to Verna Banks, but the payments did not
it could be characterized in the settlement agreement as         start until 1987 and only constituted 43.95% of Petitioner’s
compensation for personal injury damages. However,               net, rather than gross, retirement payments. Consequently,
Petitioner’s attorney testified at the tax court trial that he   arrears immediately began to accrue to Verna Banks. On
warned Petitioner that although the settlement agreement         April 6, 1988 and December 4, 1989, Verna Banks obtained
could characterize the $464,000 proceeds as personal injury      orders for the arrearage, plus attorney’s fees, and she later
damages, there was no guarantee that the IRS would               returned to court to enforce the orders in 1990. On October
subsequently agree to this characterization.                     30, 1990, the California Superior Court, taking note of
                                                                 Petitioner’s recent out-of-court settlement with the CDOE,
  On May 30, 1990, Petitioner and the CDOE entered into an       ordered Petitioner to pay Verna Banks $12,156.81 out of the
agreement that settled all of Petitioner’s outstanding claims    $464,000 settlement proceeds from the civil lawsuit Petitioner
for $464,000. The agreement provided, in part, as follows:       had filed in federal district court in California. The court
                                                                 further ordered Petitioner to place an additional $20,000, plus
  1.   The [CDOE] agrees object [sic] to pay to                  $3,850 in attorney’s fees, in an interest-bearing account until
       [Petitioner] of the sum of $464,000.00 in full and        Petitioner began to make timely payments to Verna. The
       complete satisfaction of his claims. [Petitioner]         amounts the court ordered Petitioner to pay totaled
       characterizes this payment of $464,000.00 as              $36,006.81.
       payment for personal injury damages suffered after
       [Petitioner’s] discharge on July 14, 1986.                   In 1990, Petitioner paid $72,013.62 (double the $36,006.81
                                                                 of the court’s order in lieu of posting an appellate bond) into
(J.A. at 159.) Of this $464,000, Petitioner paid $150,000 to     California Superior Court and filed several appeals, all of
his attorney in fees, pursuant to the contingency fee            which ultimately proved unsuccessful. Eventually, Verna
arrangement between them. Petitioner did not include any of      Banks agreed to receive Petitioner’s $72,013 deposit in
the $464,000 settlement proceeds as gross income on his 1990     satisfaction of all arrears (except for $45,987 in arrears
federal income tax return.                                       Petitioner owed Verna from 1979 to 1986). The court
                                                                 transferred the $72,013.62 to Verna in 1993, and Petitioner
                                                                 deducted the $72,013.62 in the 1993 tax year as an alimony
                                                                 payment deduction. However, at the tax court trial Petitioner
                                                                 argued that he was entitled to claim that deduction for the
                                                                 1990 tax year.
Nos. 01-2171/2177                          Banks v. Comm’r           7    8       Banks v. Comm’r                       Nos. 01-2171/2177

C. The Commissioner’s Notices of Deficiency and the                       three rulings was entered on May 21, 2001.3 Petitioner’s
   Tax Court’s Decision                                                   timely appeal followed.
  On May 30, 1997, the Commissioner issued a Notice of                                    II. STANDARD OF REVIEW
Deficiency to Petitioner for the tax year ending December 31,
1990,2 in the amount of $101,168.00. Petitioner filed a                      We review the tax court’s legal conclusions de novo and its
petition in the tax court, requesting a redetermination of the            factual findings for clear error. Zack v. Comm’r, 291 F.3d
deficiencies. The cases were consolidated, and the matter                 407, 412 (6th Cir. 2002) (citing MTS Int’l, Inc. v. Comm’r,
proceeded to trial.                                                       169 F.3d 1018, 1021 (6th Cir. 1999)). We will conclude that
                                                                          a factual finding is clearly erroneous only if, upon our review
  On February 28, 2001, the tax court filed a Memorandum                  of the entire record, we are “left with the definite and firm
Findings of Fact and Opinion (“tax court opinion” or                      conviction that a mistake has been committed.” Id. (quoting
“opinion”). For purposes of this appeal, the tax court opinion            Sanford v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir.
made three relevant rulings. First, it determined that the                2001)) (internal quotation marks omitted).
entire $464,000 amount Petitioner received in settlement of
his California federal court lawsuit constituted taxable income                                   III. ANALYSIS
because, contrary to Petitioner’s arguments, none of the
settlement amount was attributable to a claim of personal                 A. Whether the Amount Paid in Settlement of
injury. Second, the tax court determined that the $150,000                   Petitioner’s Lawsuit was Attributable to a Claim of
Petitioner had paid out of the $464,000 settlement amount to                 Personal Injury.
his lawyer as an attorney contingency fee was not excludable
from income. Third, the tax court agreed with Petitioner that               Petitioner challenges on appeal the tax court’s ruling that
an alimony payment to Verna Banks could have been                         the $464,000 he received in settling his California federal
deducted from his gross income for the 1990 tax year, but it              civil action was not excludable from income under Internal
further held that Petitioner was now precluded by the “duty of            Revenue Code § 104(a), 26 U.S.C. § 104(a). Specifically,
consistency” doctrine from taking the deduction.                          Petitioner argues that the tax court erred in determining that
                                                                          no portion of the $464,000 settlement amount was attributable
  Consequently, the tax court held Petitioner liable for taxes            to personal injuries he alleged in that lawsuit. We are not
on the full $464,000 settlement amount, and it disallowed any             persuaded by Petitioner’s arguments and therefore affirm the
relevant deductions therefrom. A decision embodying these                 tax court as to this issue.
                                                                            Section 61 of the Internal Revenue Code states that
                                                                          “[e]xcept as otherwise provided in this subtitle, gross income
                                                                          means all income from whatever source derived.” 26 U.S.C.
                                                                          § 61(a). In determining what constitutes gross income, we

    2                                                                         3
      The No tice actually determined deficiencies for three tax years:         Pursuant to these rulings (and other rulings which neither side
1988, 1990, and 1991. However, only tax year 19 90 is at issue in this    appealed), the tax court ruled that there existed a deficiency for
app eal.                                                                  Petitioner’s 1990 tax year in the amount of $99,068.000.
Nos. 01-2171/2177                             Banks v. Comm’r             9    10    Banks v. Comm’r                        Nos. 01-2171/2177

construe § 61 “liberally ‘in recognition of the intention of                     To satisfy Schleier, the taxpayer must show that (1) there
Congress to tax all gains except those specifically                              was an underlying claim sounding in tort; (2) the claim
exempted.’” Greer v. United States, 207 F.3d 322, 326 (6th                       existed at the time of the settlement; (3) the claim
Cir. 2000) (quoting Comm’r v. Glenshaw Glass Co., 348 U.S.                       encompassed personal injuries; and (4) the agreement
426, 430 (1955)).                                                                was executed “in lieu” of the prosecution of the tort
                                                                                 claim and “on account of” the personal injury.
   Nevertheless, the Internal Revenue Code provides for a
number of exclusions from income. One of these exclusions                      Id. at 327.
is found in § 104(a)(2), which permitted a taxpayer to exclude
from income “the amount of any damages received (whether                         Turning our attention to the first prong of the Schleier test,
by suit or agreement and whether as lump sums or as periodic                   we observe that the proper inquiry “focus[es] on the origin
payments) on account of personal injuries or sickness.”                        and characteristics of the claims settled in determining
26 U.S.C. § 104(a)(2).4 Damages received “on account of                        whether such damages are excludible under § 104(a)(2).” Id.
personal injuries” are to be distinguished from those received                 (quoting Pipitone v. United States, 180 F.3d 859, 862 (7th
on account of back pay damages, for which no exclusion from                    Cir. 1999)). A relevant aspect of this inquiry requires us to
income exists. Comm’r v. Schleier, 515 U.S. 323, 329-30                        consider whether the claim at issue provides for remedies that
(1995).                                                                        “recompense [a plaintiff] for any of the . . . traditional harms
                                                                               associated with personal injury, such as pain and suffering,
  The Supreme Court has held that a § 104(a) exclusion is                      emotional distress, harm to reputation, or other consequential
warranted only where a two-prong test has been satisfied.                      damages,” i.e., remedies other than economic damages. See
First, the taxpayer must have received the damages amount                      United States v. Burke, 504 U.S. 229, 239 (1992). Because
through the litigation of an action (or a settlement thereof)                  Petitioner abandoned the state tort claims prior to trial, the
based on tort or tort-type rights. Second, the amount must be                  relevant claims to examine in this case are Counts 1 through
paid on account of personal injuries or sickness. Schleier,                    3 of Petitioner’s second amended complaint, which represent
515 U.S. at 337. Moreover, regarding the second prong, a                       Petitioner’s claims brought under Title VII, 42 U.S.C. § 1981,
taxpayer must present “concrete evidence demonstrating the                     and 42 U.S.C. § 1983.
precise causal connection between” the taxpayer’s asserted
personal injuries and the settlement payment he or she                           Applying this analysis, we agree with the Commissioner
received. Greer, 207 F.3d at 334. More recently, we                            and the tax court that Petitioner’s Title VII claim does not
“disaggregate[d]” the Schleier two-prong test into “its                        constitute “an underlying claim sounding in tort” for purposes
disparate elements,” as follows:                                               of § 104(a)(2). Greer, 207 F.3d at 327. The Supreme Court
                                                                               has held that Title VII, at the time of Petitioner’s civil lawsuit,
                                                                               “focuse[d] on legal injuries of an economic character,” given
                                                                               that its “sole remedial focus [wa]s the award of back wages,”
    4
      Section 104(a)(2) was amende d in 1996 to limit exclusions from
                                                                               and therefore did not “redress[] a tort-like personal injury
income for personal injuries or sickness to physical injuries or sickness.     within the meaning of § 104(a)(2) and the applicable
See Sma ll Business Job Protection Act of 1996, Pub. L. No. 104-188,           regulations.” Burke, 504 U.S. at 239, 241. It is true that
§ 1605 (a), 110 Stat. 17 55, 1 838 . Ho wever, because P etitioner’s lawsuit   Congress amended Title VII in 1991 to provide Title VII
settlement occu rred prior to the passage of this amendment, this new          plaintiffs with additional monetary relief beyond back pay.
limitation on § 104 (a)(2) does not apply here. See G reer, 207 F.3d at 328.
Nos. 01-2171/2177                             Banks v. Comm’r          11     12    Banks v. Comm’r                       Nos. 01-2171/2177

See Civil Rights Act of 1991, Pub. L. No. 102-166, § 102,                     constituting a tort or tort-like action, the Court strongly hinted
105 Stat. 1071, 1072-74 (1991) (codified at 42 U.S.C.                         in its Burke decision that it deemed § 1981 to fit into this
§ 1981a). However, Petitioner had sued the CDOE under the                     category. See Burke, 504 U.S. at 240 (observing that the
old version of Title VII (“pre-1991 Title VII”), and Burke                    remedies available under pre-1991 Title VII “st[ood] in
directly controls the applicability of § 104(a)(2) to pre-Title               marked contrast not only to those available under traditional
VII damages. Id.5                                                             tort law, but under other federal antidiscrimination statutes,”
                                                                              for instance § 1981, which offered as potential remedies “both
  Petitioner alternatively argues that his §§ 1981 and 1983                   equitable and legal relief, including compensatory and, under
claims provide the requisite tort or tort-like claims on which                certain circumstances, punitive damages”).
to base his § 104(a)(2) exclusion. We agree with Petitioner.
The Supreme Court has indicated (albeit in the statute of                       The tax court had rejected Petitioner’s alternative argument.
limitations, not the § 104(a)(2), context) that § 1983 claims                 Although the court conceded that § 1981 and 1983 claims
constitute tort or tort-like actions. See Wilson v. Garcia, 471               constitute tort or tort-like actions, it found that, based on the
U.S. 261, 280 (1985) (holding that § 1983 claims “are best                    district court’s pretrial order entered in connection with his
characterized as personal injury actions”); see also City of                  lawsuit against the CDOE, Petitioner had abandoned all of his
Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S.                       tort claims, including the §§ 1981 and 1983 claims. The tax
687, 724-25 (1999) (Scalia, J., concurring in part and                        court therefore concluded that Petitioner’s §§ 1981 and 1983
concurring in the judgment) (applying Wilson’s rule to a                      claims could not provide a basis for a § 104 exclusion because
Seventh Amendment inquiry).6 Furthermore, although the                        such claims did not exist at the time of settlement, as required
Supreme Court has not expressly designated § 1981 as                          by prong two of the § 104 analysis. Petitioner points to
                                                                              several places in the pretrial order as proof that, contrary to
                                                                              any ambiguous abandonment language in the pretrial order,
                                                                              his §§ 1981 and 1983 claims were pursued at trial and were
    5
      Although Burke’s authority has be en questione d since the              in existence at the time of the parties’ settlement in 1990.
amendm ents to Title VII, its authority as to pre-1991 Title VII claims
seems to be intact. See, e.g., Abram s v. Lightolier Inc., 50 F.3d 1204,         We agree with Petitioner that the tax court erred in
1220 (3d Cir. 1995) (“We note that amendments to Title VII made by the
Civil Rights Act of 1991 allow a plaintiff to recover compensatory and
                                                                              determining that Petitioner had abandoned his 42 U.S.C.
punitive damages and thus throw doubt on the continued validity of the        §§ 1981 and 1983 actions. Both the “Points of Law” and the
Burke holding.”) (emph asis added).                                           “Disputed Factual Issues” sections of the pretrial order
                                                                              indicated that issues related to §§ 1981 and 1983 causes of
    6
      Several other circuits have held that § 1983 actions are tort actions   action were still being litigated. Therefore, Petitioner
within the meaning o f § 104 (a)(2). See Wulf v. City of Wichita, 883 F.2d    satisfied his burden regarding prong one, because he had
842, 872 -73 (10th Cir.1989) (holding that the settlement proceeds of the     litigated a claim sounding in tort, to wit, the §§ 1981 and
taxpa yer’s § 1983 civil action compensated him for personal injuries and
was excludable under § 104(a)(2)); Metzger v. Com m’r, 88 T.C. 834
                                                                              1983 claims. Similarly, Petitioner also satisfied prong
(1987), aff’d, 845 F.2d 1013 (3d Cir. 1988) (holding that claims under 42     number two because his §§ 1981 and 1983 claims existed at
U.S.C. §§ 1981 and 1983, among others, constituted “personal injury”          the time he settled his case with the CDOE, and the $464,000
claims within the meaning of § 10 4(a)(2)); Bent v. Com m’r, 835 F.2d 67,     amount he received was in settlement of those claims.
70 (3d Cir. 1987) (holding that the portion of the taxpayer’s damages
award pertaining to his § 1983 claim compensated him for his personal
injuries and could prope rly be excluded under § 104(a)(2)).
Nos. 01-2171/2177                      Banks v. Comm’r       13    14    Banks v. Comm’r                       Nos. 01-2171/2177

  As to the third prong, we find that Petitioner’s §§ 1981 and     in the record. Petitioner argues that the tax court clearly erred
1983 claims “potentially involved injuries that were               in failing to give appropriate weight to the characterization in
personal.” Greer, 207 F.3d at 328. As we have previously           the settlement agreement.
observed, §§ 1981 and 1983 claims can encompass such
personal injuries as mental anguish, damage to character, or          We agree with Petitioner that language in a settlement
damage to a personal or professional reputation, id.               agreement can offer some probative evidence of how a
(collecting cases), and these types of tangible and intangible     settlement payment should properly be characterized for
harms were contemplated by § 104(a)(2) at the time that            purposes of § 104(a)(2). See, e.g., Bent v. Comm’r, 87 T.C.
Petitioner’s settlement agreement was executed. Petitioner         236, 246 (1986), aff’d, 835 F.2d 67, 70 (3d Cir. 1987).
specifically requested in his second amended complaint,            However, in this case the settlement agreement did not
among other forms of relief, general damages (for harassment,      attempt to assess the damages of the lawsuit and allocate
humiliation, and embarrassment suffered by Plaintiff), and         Petitioner’s recovery accordingly. See Robinson v. Comm’r,
future medical and hospital expenses. Any relief granted for       102 T.C. 116, 128-29 (1994) (rejecting a settlement
these harms Plaintiff suffered could fairly be construed as        agreement’s characterization of the settlement amount, which
compensating personal injuries within the meaning of               allocated 95% to mental anguish and 5% to lost profits, as
§ 104(a)(2). See id.                                               “uncontested, nonadversarial, and entirely tax-motivated” and
                                                                   not accurately “reflect[ing] the realities of . . . [the parties’]
   However, we find that Petitioner failed to meet his burden      settlement”). In the present case, Petitioner can point to no
to show that the settlement agreement was executed “on             other evidence in the record that supports his characterization
account of personal injuries or sickness.” Greer, 207 F.3d at      of the settlement payment. For instance, his second amended
334 (quoting Schleier, 515 U.S. at 330) (internal quotation        complaint sought general damages for future (presumably,
marks omitted). Our inquiry in this regard requires us to          anticipated) medical and hospital expenses, but at the time of
examine the settlement agreement’s purpose and, absent a           settlement he offered no receipts or other information
clear purpose, the payor’s intent in settling the claims. Greer,   indicating that he had suffered medical expenses or intended
207 F.3d at 329 (citations omitted). A determination               to do so in the near future. Similarly, there is nothing in the
regarding a payor’s intent requires us to “consider[] the          record to reflect a numerical value Petitioner placed on his
amount paid, compar[e] the circumstances and amount paid           mental anguish. Indeed, the settlement agreement does not
to other agreements the company has entered into, consider[]       even indicate the CDOE’s intent in paying the settlement
the factual circumstances that led to the agreement, and           amount; the agreement merely indicates that Petitioner
weigh[] other facts that may reveal the employer’s intent.”        characterizes the $464,000 payment as compensating him for
Greer, 207 F.3d at 329 (citing Pipitone, 180 F.3d at 864-65).      personal injuries. The only intent on CDOE’s part reflected
                                                                   in the record is its intent to dispose of the case in an
  In support of his contention that he satisfied the burdens set   expeditious manner and a willingness to acquiesce in
forth under the third and fourth prongs, Petitioner points to      Petitioner’s tax-favorable characterization of the settlement
language in the settlement agreement, to wit, “[Petitioner]        proceeds. Petitioner’s characterization of his own settlement
characterizes this payment of $464,000.00 as payment for           payment, with no further support in the settlement agreement
personal injury damages suffered after [Petitioner’s] discharge    or elsewhere record, cannot control the issue.
on July 14, 1986.” (J.A. at 159.) The tax court rejected this
language as self-serving and contradicted by other evidence
Nos. 01-2171/2177                      Banks v. Comm’r       15    16       Banks v. Comm’r                           Nos. 01-2171/2177

   Not only does Petitioner fail to point to any evidence in the   B. Whether the Portion of Petitioner’s Lawsuit
record to support his characterization of the $464,000                Settlement Paid to His Attorney Under a Contingency
settlement payment, the record contains several indicia               Fee Arrangement was Excludable from Income.
tending to contradict Petitioner’s characterization. In
particular, the pretrial order pertaining to Petitioner’s            Next, Petitioner argues that the tax court erred in holding
California federal court lawsuit stated that the only “[r]elief    that the $150,000 in contingency fees he paid to his attorney
[s]ought” at trial was “reinstatement, back pay, and attorneys’    as part of the California federal court settlement was not
fees.” (J.A. at 147.) This would suggest that the claim, at        excludable from his gross income. Petitioner specifically
least at the time of settlement, no longer encompassed             contends that the tax court’s ruling in this regard contravened
personal injuries, and that the settlement agreement was           our precedent. The Commissioner argues that the tax court
executed on account of non-personal injuries, to wit,              acknowledged our precedent but properly distinguished it
economic injuries. Moreover, testimony from Petitioner’s           based on differing facts. We agree with Petitioner and reverse
lawyer, as well as a letter from Petitioner to an IRS agent,       the tax court’s determination as to this issue.
indicated that Petitioner offered to settle for $850,000, a
figure he computed based on salary, which represents                  There is a circuit split on the issue of whether contingency
economic damages as opposed to personal injuries. Petitioner       fees must be included in gross income.7 The Commissioner
nevertheless agreed to the defendants’ counteroffer of             has always taken the position that contingency fees must be
$464,000, so long as he could characterize the payment             included, based on the anticipatory assignment of income
amount in the settlement agreement as covering personal            doctrine. This theory is most typically exemplified in two
injuries. Based on the evidence favoring the Commissioner,         Supreme Court cases: Lucas v. Earl, 281 U.S. 111 (1930),
the tax court’s finding on this point was not clearly erroneous,   and Helvering v. Horst, 311 U.S. 112 (1940). In Lucas, the
and we decline to overturn it.                                     taxpayer assigned one-half of his future salary to his wife to
                                                                   avoid paying taxes on the entire salary, and argued in
  We agree with the Commissioner that the 1990 settlement          litigation that because he had never actually received the
of Petitioner’s California federal court action against the        income before distributing it to his wife, it was not income to
CDOE and other defendants for $464,000 does not fall under         him. The Supreme Court disagreed, reasoning that because
the § 104(a)(2) exclusion from income. Although some of            the taxpayer had earned and created the right to receive and
Petitioner’s claims, at the time of the settlement, were “based    enjoy the benefit of the income before assigning it, he was
upon tort or tort type rights,” Schleier, 515 U.S. at 337,
Petitioner failed to meet his burden of showing that his
                                                                        7
§§ 1981 and 1983 claims were settled on account of his                   The Fifth, Sixth, and E leventh Circuits have held that contingency
personal injuries. Specifically, Petitioner has not met his        fees are exclud able. See Foster v. U nited States, 249 F.3d 1275 (11th Cir.
burden of establishing a causal connection between his             2001); Srivastava v. Com m’r, 220 F.3d 353 (5th C ir. 200 0); Estate of
                                                                   Clarks v. United States, 202 F.3d 8 54 (6th Cir. 2000). T he Third, Fourth,
$464,000 settlement payment and any personal injuries he           Seventh, Ninth, Tenth, and Federal Circuits have taken the opposite view.
may have suffered. Because the settlement amount could not         See Cam pbell v. Co mm ’r, 274 F.3d 1312 (10th Cir. 200 1); Kenseth v.
be excluded under § 104(a)(2), it was properly included as         Com m’r, 259 F.3d 881 (7th Cir. 2001); Young v. Com m’r, 240 F.3d 369
income under 26 U.S.C. § 61(a). We therefore affirm the tax        (4th Cir. 200 1); Benci-Woo dwa rd v. Comm ’r, 219 F.3d 9 41 (9th Cir.
court’s determination on this issue.                               2000); Coa dy v. Co mm ’r, 213 F.3d 118 7 (9th Cir. 2000 ); Baylin v. United
                                                                   States, 43 F.3d 1451 (Fed . Cir. 19 95); O’B rien v. Com m’r, 38 T.C. 707
                                                                   (1962), aff’d, 319 F.2d 5 32 (3d C ir. 1963) (per curiam).
Nos. 01-2171/2177                     Banks v. Comm’r       17    18   Banks v. Comm’r                        Nos. 01-2171/2177

subject to taxation on the entire salary. 281 U.S. at 114-15.       Nevertheless, the first case to address the tax treatment of
The Court further emphasized that the fundamental purpose         contingency fee arrangements declined to apply the
of the tax code–to tax income to those who create, earn and       assignment of income doctrine to contingency fee payments.
enjoy it– “could not be escaped by anticipatory arrangements      In Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959),
and contracts however skilfully devised to prevent the salary     following a successful Alabama court lawsuit to enforce a
when paid from vesting even for a second in the man who           contract, the taxpayer paid her legal counsel a portion of the
earned it.” Id. at 115. Thus, the Court declined to honor         judgment award, pursuant to a contingency fee arrangement
attempts to attribute fruits “to a different tree from that on    between them. The Commissioner subsequently treated the
which they grew” and held the entire salary, not just half,       taxpayer’s entire judgment award, including the contingency
constituted taxable income to the taxpayer. Id.                   fee portion, as taxable income and assessed tax deficiencies
                                                                  accordingly. The court held that the contingency fee portion
   Similarly, in Horst, the taxpayer owned negotiable bonds.      of the judgment award was not income to the taxpayer. In
Shortly before their maturity date, he removed the interest       concluding that the anticipatory assignment of income
coupons from the bonds and gave them to his son, who              doctrine did not apply to the contingency fee the taxpayer
subsequently collected interest on them. 311 U.S. at 114.         paid to her legal counsel, the Cotnam court looked to
During litigation, the taxpayer argued that the interest          Alabama’s attorney’s lien statute, which at the time provided
payments were not taxable to him because he never received        that
the interest payments. Again, the Supreme Court disagreed.
Observing that “[t]he dominant purpose of the revenue laws          [u]pon suits, judgments, and decrees for money,
is the taxation of income to those who earn or otherwise            [attorneys] shall have a lien superior to all liens but tax
create the right to receive it and enjoy the benefit of it when     liens, and no person shall be at liberty to satisfy said suit,
paid,” it concluded that the tax established by the 1934            judgment or decree, until the lien or claim of the attorney
Revenue Act could not “fairly be interpreted as not applying        for his fees is fully satisfied; and attorneys at law shall
to income derived from interest or compensation when he             have the same right and power over said suits, judgments
who is entitled to receive it makes use of his power to dispose     and decrees, to enforce their liens, as their clients had or
of it in procuring satisfactions which he would otherwise           may have for the amount due thereon to them.
procure only by the use of the money when received.” Id. at
119 (alterations in original). Therefore, the Court reasoned,     Id. at 125 n.5 (citing Ala. Code § 64 (1940)). In other words,
because the taxpayer had earned and created the right to          the Cotnam court reasoned, the statute provided an attorney
receive and enjoy the benefit of the income by virtue of the      with an equitable lien that effectively transferred part of the
fact that he owned the bonds and the interest generated           taxpayer’s claim to the attorney. The practical consequence
therefrom was guaranteed to him when he transferred the           of Alabama’s attorney’s lien law was that an attorney in
coupons, the income could fairly be attributed to him for         Alabama held an equity interest in both the cause of action
taxation purposes. Id. at 117-20. Again reasoning that “the       and the judgment, and the taxpayer, as the client, was
fruit is not to be attributed to a different tree from that on    precluded from ever realizing income on that percentage of
which it grew,” id. at 120 (citing Lucas, 281 U.S. 115), the      the judgment representing the contingency fee.
Court held that the transferred coupons constituted taxable
income to the taxpayer. Id.                                         The Cotnam court declined to apply the anticipatory
                                                                  assignment of income doctrine, noting that, unlike the
Nos. 01-2171/2177                      Banks v. Comm’r       19    20    Banks v. Comm’r                     Nos. 01-2171/2177

circumstances in Lucas and Horst, the attorneys’ claim to          litigation claim, was not already earned, vested, or even
payment lacked fair market value and that it was uncertain as      relatively certain to be paid to the assignor, but instead was
to when or whether the attorneys’ claim would attain value         merely “an intangible, contingent expectancy,” dependent
(given that contingency fees are only paid in the event of a       upon the attorney’s skills to realize any value from it. Id. at
successful outcome of the taxpayer’s lawsuit). Indeed, the         857. We then compared the contingency fee arrangement to
court noted, the claim was “worthless without the aid of           a division of property:
skillful attorneys.” Id. at 125. Therefore, the Cotnam court
concluded, because (1) the contingency fee never passed              Here the client as assignor has transferred some of the
through the taxpayer’s hands or was controlled by the                trees in his orchard, not merely the fruit from the trees.
taxpayer, and (2) only the attorney’s services resulted in           The lawyer has become a tenant in common of the
converting the uncertain claim into an item of value, the            orchard owner and must cultivate and care for and
taxpayer properly excluded the contingency fee portion of his        harvest the fruit of the entire tract. Here the lawyer’s
judgment from his income. Id. at 127.                                income is the result of his own personal skill and
                                                                     judgment, not the skill or largess of a family member
  We adopted the Cotnam doctrine in Estate of Clarks v.              who wants to split his income to avoid taxation. The
United States, 202 F.3d 854 (6th Cir. 2000). In that case, the       income should be charged to the one who earned it and
taxpayer received a jury award in a Michigan state court             received it, not . . . to one who neither received it nor
personal injury suit, and the attorney received one-third of the     earned it.
judgment award and interest as a contingency fee. The
taxpayer soon thereafter died, and the estate, when filing the     Id. at 858.
taxpayer’s income tax return, properly included in gross
income the interest portion of the judgment, but excluded the         We then distinguished Earl and Horst on three additional
portion of the amount contingency fee attributable to interest.    grounds. First, unlike the true income assignments in Earl
Id. at 855. In holding that the exclusion was proper, we           and Horst, no tax avoidance purpose motivated the
rejected the Commissioner’s position for reasons similar to        contingency fee arrangement; rather a business purpose
those articulated in Cotnam. First, we pointed out that            motivated it. Id. at 858. Second, unlike the Earl and Horst
Michigan’s attorney lien law operates in essentially the same      assignees who performed no services to earn their income, the
way as the Alabama statutory lien examined in Cotnam, and          attorney earned his income because the income resulted from
essentially amounted to an assignment of a portion of the          his own skill and judgment. We also were motivated by the
potential judgment. The record had indicated that the client       fact that applying the assignment of income doctrine to
originally owned the underlying claim but then relinquished        contingency fees would result in double taxation, whereas in
his right to receive payment for the lawyer’s contingency fee      Earl and Horst, the assignees could exclude what they
portion of any judgment upon signing the contingency fee           received as gifts. Id. at 857, 858.
contract.
                                                                     In the instant case, the tax court acknowledged the Estate
  Like the Cotnam court, we then proceeded to reject the           of Clarks decision but distinguished it on the grounds that
anticipatory assignment of income doctrine as applied to           Petitioner’s underlying lawsuit, from which his attorney’s
contingency fees. In distinguishing the Earl and Horst             contingency fee was generated, took place in California.
decisions, we reasoned that a contingency fee, as part of a        California’s law on attorneys’ contingency fees, unlike
Nos. 01-2171/2177                     Banks v. Comm’r       21    22    Banks v. Comm’r                       Nos. 01-2171/2177

Alabama’s law, does not operate under a lien theory. Rather,      “that the Internal Revenue Code was intended to turn upon
California’s lien statute confers no ownership interest on        such refinements”).
attorneys, and “[c]ontingent fee contracts ‘do not operate to
transfer a part of the cause of action to the attorney but only     More importantly, the reasoning in Estate of Clarks case
give him a lien upon his client's recovery.’” Benci-              seems to have been based on more than the nature of
Woodward, 219 F.3d at 943 (citations omitted). Thus, in           Michigan’s lien law. To be sure, the similarity between
California an attorney who is entitled to a contingency fee       Michigan’s attorney’s lien statute in Estate of Clarks and
“acquires no more than a professional interest,”id., and is no    Alabama’s attorney’s lien statute in Cotnam played a role in
different from an ordinary creditor who, if “stiffed” on his      the outcome. Estate of Clarks, 202 F.3d at 856. However,
payment, would have to enforce the contract judicially. On        we found other factors persuasive in distinguishing
appeal, Petitioner urges this Court not to draw distinctions      contingency fees from Lucas and Horst, including the
based on the lien theory of the particular state in which an      following: (1) the fact that the claim, at the time the
action arises. We agree with Petitioner.                          contingency fee agreement was signed, was “an intangible,
                                                                  contingent expectancy,” (2) taxpayer’s claim was like a
   We find persuasive the reasoning of the Fifth Circuit, which   partnership or joint venture in which the taxpayer assigned
recently faced similar factual circumstances. In Srivastava v.    away one-third in hope of recovering two-thirds; (3) no tax-
Comm’r, 220 F.3d 353, 363-64 (5th Cir. 2000), the                 avoidance purpose was at work with the contingency fee
Commissioner argued that Cotnam was not controlling               arrangement, as there ostensibly was in Lucas and Horst; and
because the taxpayer’s contingency fee agreement was              (4) double taxation would otherwise result by including the
controlled by Texas law, and Texas’ attorney’s lien statute did   contingency fee in taxpayer’s income. Id. at 857-58.
not provide attorneys with a superior claim lien against their
clients’ judgments or any ownership interests. The Srivastava        The Estate of Clarks holding does not primarily rest on the
court declined to distinguish Cotnam based on the differing       rationale that separate state lien laws governing attorneys’
state attorney’s lien laws, instead determining that “the         rights determine the correct characterization of an attorney
answer [as to whether to apply Cotnam] does not depend on         contingency fee. We therefore hold that Estate of Clarks is
the intricacies of an attorney’s bundle of rights against the     controlling in the present case, notwithstanding the difference
opposing party under the law of the governing state.” Id. at      in Michigan’s and California’s respective attorney’s lien laws.
364. We likewise are not inclined to draw distinctions            In so holding, we will follow our precedent without protracted
between contingency fees based on the attorney’s lien law of      inquiries into “the intricacies of an attorney’s bundle of
the state in which the fee originated. Given the various          rights.” Srivastava, 220 F.3d at 364. The nature of
distinctions among attorney’s lien laws among the fifty states,   Petitioner’s attorney’s rights notwithstanding, the facts of this
such a “state-by-state” approach would not provide reliable       case are within the scope Estate of Clarks contemplated: By
precedent regarding our adherence to the Cotnam doctrine or       signing the contingency fee agreement, Petitioner transferred
provide sufficient notice to taxpayers as to our tax treatment    some of the trees from the orchard, rather than simply
of contingency-based attorneys fees paid from their respective    transferring some of the orchard’s fruit. Estate of Clarks, 202
jury awards. Cf. O’Brien v. Comm’r, 38 T.C. 707, 712              F.3d at 858.
(1962), aff’d, 319 F.2d 532 (3d Cir. 1963) (per curiam)
(rejecting distinctions in applying the Cotnam doctrine, based      We therefore hold that Estate of Clarks is not
upon differing state attorney’s lien laws because it doubted      distinguishable based on the distinctions between California’s
Nos. 01-2171/2177                                Banks v. Comm’r            23     24   Banks v. Comm’r                       Nos. 01-2171/2177

attorney’s lien law and Michigan’s lien law. Thus, consistent                      68, at *29. On appeal, Petitioner asserts that this ruling was
with our prior precedent in Estate of Clarks, we hold that the                     erroneous as a matter of law. Because the tax court failed to
$150,000 Petitioner paid in contingency fees to his attorney                       follow our precedent as to the “duty of consistency” rule, we
is excludable from his gross income. Because the tax court                         reverse the tax court’s ruling with respect to this issue and
erred in determining that the $150,000 was not excludable, we                      remand for further consideration.
reverse the tax court as to this issue.
                                                                                      The “‘duty of consistency’ rule prevents a taxpayer who has
C. Whether the Tax Court Properly Denied Petitioner’s                              already had the advantage of a past misrepresentation–in a
   1990 Alimony Deduction Pursuant to the “Duty of                                 year now closed to review by the government–from changing
   Consistency” Doctrine.                                                          his position and, by claiming he should have paid more tax
                                                                                   before, avoiding the present tax.” Lewis v. Comm’r, 18 F.3d
  Finally, Petitioner appeals the tax court’s ruling regarding                     20, 26 (1st Cir. 1994) (citing Beltzer v. United States, 495
the deductibility of his alimony payments. At trial, Petitioner                    F.2d 211, 212-13 (8th Cir. 1974)). When this situation arises,
had sought to claim as a deduction for the 1990 tax year the                       “the Commissioner may act as if the previous representation,
$72,013.62 alimony payment he made to Verna Banks. He                              on which he relied, continued to be true, even if it is not. The
had argued that although he took the deduction in 1993 (when                       taxpayer is estopped to assert the contrary.” Eagan v. United
the California Superior Court had transferred the funds to                         States, 80 F.3d 13, 17 (1st Cir. 1996). The rule’s purpose is
Verna), because he had paid the funds into court in 1990 he                        to “preclude[] parties from ‘playing fast and loose with the
should have taken the deduction then, pursuant to § 461(f) of                      courts’” by taking a position in a given tax year, then taking
the Internal Revenue Code, 26 U.S.C. § 461(f).8 In denying                         a contrary position once the statute of limitations has run on
Petitioner the deduction, the tax court had agreed with                            that taxable year. Estate of Ashman v. Comm’r, 231 F.3d 541,
Petitioner that an alimony deduction would properly have                           543 (9th Cir. 2000) (quoting Russell v. Rolfs, 893 F.2d 1033,
been taken in 1990. However, the tax court continued,                              1037 (9th Cir. 1990)).
because the Commissioner was now precluded by the § 6501
statute of limitations from adjusting Petitioner’s 1993 tax                          The controlling case on this doctrine is Crosley Corp. v.
year, the duty of consistency doctrine prevented Petitioner                        United States, 229 F.2d 376 (6th Cir. 1956), which instructs
from “taking one position on one tax return and a contrary                         that for the “duty of consistency” doctrine to apply,
position on another return for which the limitation period has
run.” 81 T.C.M. (CCH) 1219, 2001 Tax Ct. Memo LEXIS                                  the taxpayer by his conduct must knowingly make a
                                                                                     representation or conceal a material fact which he intends
                                                                                     or expects will be acted upon by taxing officials in
    8
                                                                                     determining his tax, and the true or concealed material
       Section 461 provides a deduction for p ayment of alimony.                     facts are unknown to the taxing officials or they lack
Specifically, § 461 (f) provides that whe re the alimony pa yment is a               equal means of knowledge with the taxpayer, and act on
“contested liability,” then a transfer o f such co ntested funds is deductible
if the following four criteria are me t: (1) taxpayer contests an asserted
                                                                                     his representation or concealment, and to retrace their
liability, (2) he transfers money or other property to provide for the               steps on a different state of facts would cause loss of
satisfaction of such liability, (3) the contested na ture of the liability still     taxes to the Government. A material factor is the
exists after the transfer has been completed, and (4) but for the fact that          availability of the necessary facts to the parties involved.
the asserted liability is contes ted, a deduction would be allowed in the
taxable year of the transfer. 26 U.S.C. § 46 1(f).
Nos. 01-2171/2177                            Banks v. Comm’r          25     26    Banks v. Comm’r                      Nos. 01-2171/2177

Id. at 380-81. Additionally, “[e]stoppel is an affirmative                   made no findings as to these issues. Instead, it declared that
defense and the burden of proof is on the person asserting it.”              because 1993 was a closed tax year and the circumstances
Id. at 381 (citing Helvering v. Brooklyn City R.R. Co., 72 F.2d              satisfied all the elements of the “duty of consistency” rule,
274, 275 (2d Cir. 1934)). In Crosley, the taxpayer had                       Petitioner was precluded from arguing the deductibility of the
erroneously deducted certain expenses over one year, instead                 alimony payment as to the 1990 tax year. However, aside
of capitalizing them over two years. He therefore filed a                    from noting that 1993 was a closed tax year, the court did not
claim for refund with respect to the lost year. Id. at 378. The              address the other elements of the “duty of consistency” rule
district court granted summary judgment in favor of the                      as articulated in Crosley, most particularly our requirement
government based on the duty of consistency doctrine. We                     that Petitioner seeks to make a contrary factual representation,
reversed, noting that “[t]here was no misrepresentation of any               as opposed to correcting an earlier erroneous interpretation of
fact by the taxpayer,” id. at 381, and that, “[u]nder the facts              the law. Thus, it appears that the tax court was applying a
which were known to the Commissioner, or were readily                        standard other than the standard established by Crosley.
available to him, it was a question of law whether the                       Application of a rule contrary to our own is erroneous,
deduction was properly taken in 1939 or should have been                     because the tax court is bound to follow Sixth Circuit
treated as a capital expenditure. A mutual mistake of law on                 precedent. See Golsen v. Comm’r, 54 T.C. 742, 756-57
the part of the taxpayer and the Commissioner in treating it as              (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). We therefore
a cost of manufacturing does not create an estoppel.” Id. We                 hold that the tax court must reconsider this issue in light of
therefore reversed the judgment and remanded for further                     our precedent in Crosley.
proceedings. Id. 9
                                                                               The Commissioner invites us to affirm the tax court’s
  The Crosley case controls the present matter and mandates                  denial of a § 461 deduction to Petitioner on the alternative
a reversal of the tax court’s finding on this issue. We note                 ground that Petitioner failed to establish on the record that his
that the tax court made no finding that Petitioner engaged in                $72,013 payment constituted alimony within the meaning of
a misrepresentation, as Crosley requires. Moreover, as                       § 71(b). The Commissioner argues that Petitioner failed to
Petitioner correctly asserts, his mistake in taking the alimony              meet the § 71 standard because the record indicates that
deduction in 1993 instead of 1990 was a mistake of law, not                  Petitioner’s payments were for Verna’s divisible community
of fact. Finally, there is an open issue as to whether the                   property share of Petitioner’s military retirement benefits, and
Commissioner had the same facts on hand as did Petitioner                    that this really was “a non-deductible division of community
when he took the § 461 deduction in 1993. The tax court                      property between the divorced spouses.” (Commissioner’s
                                                                             Br. at 45.) The Commissioner adds that the $72,013
                                                                             represented security for satisfaction of the arrears on Verna’s
    9                                                                        payments, but also attorney’s fees, which are not deductible.
      Oth er circuits similarly have required that evidence of a
misrepresentation be presented in order for the duty of consistency
doctrine to apply. See, e.g., Ea gan , 80 F.3d at 17 (“The duty of
                                                                                We decline the Commissioner’s invitation. First of all, it
consistency arises when the following elements are present: ‘(1) a           does not appear that the Commissioner contested at the tax
representation or report by the taxpayer; (2) on which the Commissioner      court trial the issue of whether Petitioner’s $72,013 payment
has relied; a nd (3) an attempt by the taxpayer after the statute of         to his former spouse constituted alimony within the meaning
limitations has run to change the previous representation or to              of § 71. Moreover, although the tax court indicated that
recharacterize the situation in such a way as to harm the Commissioner.’”)
(quoting Herring ton v. Co mm ’r, 854 F.2d 755 , 758 (5th C ir. 198 8)).
                                                                             Petitioner should have taken the § 461 deduction in 1990 as
Nos. 01-2171/2177                      Banks v. Comm’r       27    28   Banks v. Comm’r                      Nos. 01-2171/2177

opposed to 1993, the tax court did not elaborate on the            on the “duty of consistency” doctrine. We REMAND this
analysis, and in particular the tax court offered no detailed      case to the tax court for further consideration consistent with
discussion as to whether the $72,013 payment constituted           this opinion.
alimony within the meaning of § 71, as required by § 461.
Therefore, while the Commissioner may be correct as to the
proper characterization of the $72,013 payment, it is not clear
on the present record whether the tax court made a specific
factual finding as to whether Petitioner’s $72,013 payment
constituted § 71 alimony, or whether the court was assuming
arguendo that the $72,013 payment constituted alimony for
purposes of rejecting Petitioner’s argument based on the
“duty of consistency” doctrine. Further, it is not clear on this
record whether such a finding was erroneous, if indeed the tax
court made such a finding. We are not inclined, on this
limited record, to determine the character of the $72,013
payment or the propriety of a § 461 deduction
(notwithstanding the “duty of consistency” doctrine) in
reviewing the tax court’s ultimate resolution of the issue.
  Because the tax court did not follow our precedent in
Crosley in determining that the doctrine of consistency
applies, we reverse the tax court’s denial of the § 461
deduction Petitioner seeks. However, on remand, the tax
court, if it deems appropriate, may revisit the issue of whether
the $72,013 payment constituted alimony within the meaning
of § 71. In making this determination, the court may consider
any new evidence the Commissioner or Petitioner wishes to
present on the issue.
                    IV. CONCLUSION
  For the foregoing reasons, we AFFIRM the tax court’s
decision that Petitioner’s California federal court suit
settlement proceeds were not excludable from gross income
under 26 U.S.C. § 104. However, we REVERSE the tax
court’s determination that the contingency fees Petitioner paid
to his attorney constituted taxable income, and we
REVERSE the tax court’s ruling that Petitioner could not
deduct his alimony payments for the 1990 taxable year based
Nos. 01-2171/2177                     Banks v. Comm’r      29    30   Banks v. Comm’r                       Nos. 01-2171/2177

 ______________________________________________                  disagree with the majority’s assessment that the Tax Court
                                                                 did not appear to apply our half-century-old case, Crosley
  CONCURRING IN PART, DISSENTING IN PART                         Corp. v. United States, 229 F.2d 376 (6th Cir. 1956), and that
 ______________________________________________                  the Tax Court did not appear to make any relevant factual
                                                                 findings. Therefore I do not disagree with remanding this
  KAREN NELSON MOORE, Circuit Judge, concurring in               issue to the Tax Court for further proceedings. I note that this
part and dissenting in part. Although I agree with much of       case seems to me to be one where the duty of consistency
the majority’s thoughtful opinion, I write separately to         applies, because the taxpayer has unique knowledge regarding
express my disagreement regarding the contingency-fee issue.     the nature and timing of his payments for his ex-wife, such
                                                                 that he should not be able to take one position on one tax
   As the majority holds, we are bound by our circuit’s recent   return and a diametrically opposite position on another return
decision in Estate of Clarks v. United States, 202 F.3d 854      on which the statute of limitations has run against the
(6th Cir. 2000), which held that the lawyer’s contingency fee    government. I suggest that in revisiting this issue, the Tax
operated as a lien on the client’s recovery that under           Court is free to determine whether there was a representation
Michigan law transferred part of the ownership of the client’s   by the taxpayer as well as to evaluate the other requirements
claim to the attorney, such that the client never realized       that comprise our version of the duty of consistency. I agree
income on the contingency-fee part of the judgment. We are       with the majority that on remand the Tax Court also may
dealing here, however, not with Michigan law but with            address the underlying question whether the payment even
California law regarding the characterization of the lawyer’s    constituted § 71 alimony at all.
contingency-fee interest in taxpayer Banks’s employment-
related claim. California’s law has been authoritatively and       Finally, I concur fully in the majority’s determinations that
persuasively construed by a panel of the Ninth Circuit in        the taxpayer’s characterization of the settlement proceeds as
Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir.           payment for personal injuries is worth no weight and that the
2000), which held that, “[u]nder California law, an attorney     Tax Court properly determined that no portion of the
lien does not confer any ownership interest upon attorneys or    settlement amount was attributable to personal injuries.
grant attorneys any right and power over the suits, judgments,
or decrees of their clients.” Id. at 943 (relying on Isrin v.
Superior Court, 403 P.2d 728, 732, 733 (Cal. 1965)).
California law, as explained by the California Supreme Court
and the Ninth Circuit, clearly treats the attorney’s
contingency-fee contract as simply a security interest and not
as an ownership interest. Thus I would affirm the Tax
Court’s ruling here that the proceeds the taxpayer paid to his
attorney as a contingency fee should be included in the
taxpayer’s income. See also Srivastava v. Commissioner, 220
F.3d 353, 367-69 (5th Cir. 2000) (Dennis, J., dissenting).
  Regarding the issue of the deductibility of the taxpayer’s
payments to his ex-wife and the duty of consistency, I do not
