                       T.C. Memo. 2005-29



                     UNITED STATES TAX COURT



        DAN C. AND CASSANDRA T. WILLIAMS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18530-02.             Filed February 17, 2005.



     Justin J. Zarcone and Brian P. Morrison, for petitioners.

     Vivian N. Rodriguez, for respondent.



                       MEMORANDUM OPINION

     GERBER, Chief Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes for 1998 and 1999 as follows:

                    Year            Deficiency

                    1998             $83,171
                    1999              80,220
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     The parties filed cross-motions for summary judgment

pursuant to Rule 1211 on the sole issue as to whether amounts

paid to an attorney under a contingency fee arrangement may be

excluded from petitioners* income.

Background

     Petitioners Dan C. and Cassandra T. Williams resided in

Marathon, Florida, at the time their petition was filed.    During

1998, petitioners retained an attorney to represent them in a

lawsuit against Ms. Williams’s former employer for statutory

employment discrimination under Federal and State laws and for

tortious conduct under State law.    As part of the retention

agreement, petitioners* attorney was entitled to a contingency

fee of 40 percent of the proceeds of the lawsuit, plus

reimbursement for all costs.

     Petitioners* attorney filed suit in the U.S. District Court

for the Southern District of Florida.    Prior to trial,

petitioners settled all claims against Ms. Williams’s former

employer for $500,000.   The settlement agreement provided for a

release of all Federal and State claims in exchange for

petitioners’ receiving one $250,000 payment during 1998 and one

in 1999.   Petitioners* attorney received the payments in accord



     1
       Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
taxable years at issue.
                                - 3 -

with the settlement agreement and deposited them into his trust

account.   During 1998 and 1999, he issued checks to petitioners

in the amounts of $143,356 and $150,000, respectively.    These

payments consisted of the settlement payments net of attorney

fees and costs.   Accordingly, petitioners received net settlement

proceeds of $293,356.   Petitioners did not report the settlement

proceeds on their 1998 or 1999 Federal income tax returns.

Discussion

     The parties stipulated that petitioners may not exclude any

portion of the settlement from gross income under section 104 and

that petitioners* net receipts of $293,356 are includable in

gross income under section 61(a).   The sole issue remaining in

dispute is whether that portion of the settlement representing

the attorney*s contingency fee of $206,644 should be included in

petitioners* gross income for their 1998 and 1999 tax years.

     Summary judgment is intended to expedite litigation and

avoid unnecessary trials.    Fla. Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988).   A motion for summary judgment may be

granted if there is no genuine issue as to any material fact.

See Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226,

238 (2002).   The moving party bears the burden of showing that

there is no genuine issue of material fact, and factual

inferences will be read in a manner most favorable to the party

opposing summary judgment.    Bond v. Commissioner, 100 T.C. 32, 36
                               - 4 -

(1993); Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985).      In

this controversy, there is no dispute over any material fact, and

a decision may be rendered as a matter of law.   Consequently,

this case is ripe for summary judgment.

     Petitioners argue that they did not earn or have control

over the contingency fee portion of the settlement payments and

that the portion of the settlement that paid the attorney’s fees

is   therefore not includable in their gross income.   Conversely,

respondent asserts that the contingency fee was an anticipatory

assignment of income from petitioners to their attorney and

includable in petitioners* gross income.

     Until recently, there was a split of authority among the

Courts of Appeals on this issue.2   However, the U.S. Supreme



     2
       Some Courts of Appeals held that taxpayers may not exclude
attorney’s fees from their gross income. See Hukkanen-Campbell
v. Commissioner, 274 F.3d 1312 (10th Cir. 2001), affg. T.C. Memo.
2000-180; Kenseth v. Commissioner, 259 F.3d 881 (7th Cir. 2001),
affg. 114 T.C. 399 (2000); Young v. Commissioner, 240 F.3d 369
(4th Cir. 2001), affg. 113 T.C. 152 (1999); Alexander v. IRS, 72
F.3d 938 (1st Cir. 1995), affg. T.C. Memo. 1995-51; Baylin v.
United States, 43 F.3d 1451 (Fed. Cir. 1995); O*Brien v.
Commissioner, 319 F.2d 532 (3d Cir. 1963), affg. per curiam 38
T.C. 707 (1962). Other Courts of Appeals held that a contingency
fee paid to an attorney is not income to the taxpayer receiving a
settlement. See Foster v. United States, 249 F.3d 1275 (11th
Cir. 2001); Estate of Clarks v. United States, 202 F.3d 854 (6th
Cir. 2000); Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959),
affg. in part and revg. in part 28 T.C. 947 (1957). The Court of
Appeals for the Ninth Circuit ruled on both sides of this issue.
See Banaitis v. Commissioner, 340 F.3d 1074 (9th Cir. 2003),
affg. in part and revg. in part T.C. Memo. 2002-5; Coady v.
Commissioner, 213 F.3d 1187 (9th Cir. 2000), affg. T.C. Memo.
1998-291.
                               - 5 -

Court resolved the split in the Circuits after the submission of

the cross-motions for summary judgment in this case, rendering

moot much of the controversy here.     See Commissioner v. Banks,

543 U.S. ___, 125 S. Ct. 826 (2005).    The Court held that,

generally, to the extent a litigant’s recovery includes income,

that income includes the portion of recovery that constitutes an

attorney’s contingent fee.   Id.   The Supreme Court’s holding

follows the view consistently held by this Court.    See Kenseth v.

Commissioner, 114 T.C. 399, 408 (2000), affd. 259 F.3d 881 (7th

Cir. 2001); O*Brien v. Commissioner, 38 T.C. 707, 712 (1962),

affd. per curiam 319 F.2d 532 (3d Cir. 1963).    Nonetheless, we

shall briefly address petitioners’ contentions.

     Petitioners argue that Cotnam v. Commissioner, 263 F.2d 119

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

(1957), is controlling in this case.3    In Cotnam, the Court of

Appeals for the Fifth Circuit held that a contingency fee paid

directly to a taxpayer*s attorney was excludable from the

taxpayer*s gross income.   In so holding, the Court of Appeals

relied heavily on the Alabama attorney lien statute, which the

court concluded afforded the taxpayer*s attorney an equitable

assignment or lien, thus enabling the attorney to hold an equity


     3
       The Court of Appeals for the Eleventh Circuit, which
includes Florida, has adopted as binding precedent the caselaw of
the former Court of Appeals for the Fifth Circuit, as of Sept.
30, 1981. Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir.
1981).
                                - 6 -

interest in the taxpayer*s cause of action.   Under that

reasoning, the Court of Appeals concluded that the attorney held

the same rights as the client with respect to the contingency fee

portion of the settlement and the taxpayer*s attorney, not the

taxpayer, realized the income with respect to the contingency

fee.

       We need not analyze the validity of this argument.   The

Supreme Court stated that regardless of whether State law

purported to give attorneys an “ownership” interest in their

fees, no State law of which it was aware converted the typical

principal-agent relationship between the client and attorney to a

partnership so that the contingency fee would not be taxable to

the client-principal.    Commissioner v. Banks, supra (discussing

Cotnam v. Commissioner, supra at 125).    Furthermore, because the

arguments were not advanced at earlier stages in the litigation,

the Court refused to address whether (1) the contingent-fee

arrangement established a subchapter K partnership, (2) the

attorney’s fee constituted a capital expense, or (3) the fee was

a deductible reimbursed employee business expense.    Id.

Accordingly, Commissioner v. Banks dictates that the entire

amount of petitioners’ recovery is included in petitioners’

income.

       Petitioners advance no arguments the Supreme Court did not

consider.    Therefore, petitioners have received income in an
                                 - 7 -

amount that includes that portion of recovery that constitutes

the attorney’s contingent fee.

     Gross income means all income from whatever source derived,

unless excluded by law.   Sec. 61(a); Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 430 (1955).       We find no such exclusion

in this case.   The contingency fee portion of petitioners*

settlement is includable in their gross income, and the tax

consequences cannot be avoided by assignment of a portion of the

settlement to pay legal fees.    See Commissioner v. Banks, supra;

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

111 (1930).

     In summary, the Florida attorney lien law does not furnish a

basis for excluding the contingency fee portion of petitioners’

settlement from their gross income.       Accordingly, we hold that

petitioners are to include in gross income the portion of the

settlement representing attorney’s fees in the amounts of

$106,644 and $100,000 for the taxable years 1998 and 1999,

respectively.

     To reflect the foregoing,



                                         An order and decision

                                 will be entered for respondent.
