Hukkanen-Campbell v. CIR

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
DEC 19 2001
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

NANCY J. HUKKANEN-
CAMPBELL,
Petitioner - Appellant, No. 00-9030
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.

APPEAL FROM THE DECISION OF THE
UNITED STATES TAX COURT
(T.C. Docket No. 12371-98)

Russell R. Young (Roger J. Jones with him on the briefs) of Mayer, Brown &
Platt, Chicago, Illinois, for Petitioner-Appellant.

Tamara W. Ashford (Richard Farber and Kenneth W. Rosenberg on the brief),
Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.

_________________________

Before KELLY and McKAY, Circuit Judges, and BROWN, Senior District
Judge. *
_________________________

McKAY, Circuit Judge.

*
Honorable Wesley E. Brown, Senior United States District Judge for the
District of Kansas, sitting by designation.
 _________________________

Petitioner prevailed in a Title VII lawsuit against her former employer.

The defendant in that action paid Petitioner $150,000 in partial satisfaction of the

judgment. The $150,000 payment was issued jointly to Petitioner and her

attorneys. She received $76,600.75 of the settlement; her attorneys retained the

remaining $73,399.25 as legal fees.

Originally, Petitioner reported the entire $150,000 as “Other Income” on

her 1993 federal income tax return. She also claimed an itemized deduction for

the legal fees. In 1995, she filed an amended tax return in which she excluded the

$150,000 payment from her income entirely, claiming a refund of $20,075. The

Commissioner denied the refund and issued to her a deficiency notice in the

amount of $17,402. This deficiency resulted from the application of the

Alternative Minimum Tax (“AMT”). The AMT precludes various miscellaneous

itemized deductions including fees paid to attorneys by taxpayers.

Petitioner challenged the deficiency in Tax Court arguing that the proceeds

of the lawsuit were excluded from income under § 104(a)(2). Alternatively, she

argued that the portion paid to her attorneys pursuant to her contingent fee

arrangement was not includable in gross income. The Tax Court held that the

entire $150,000 was subject to taxation and that the amount paid to her attorneys

qualified as a miscellaneous itemized deduction. However, since the computation

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of the AMT disallows deductions for attorney fees, the Tax Court upheld the

$17,402 deficiency. Petitioner timely appealed. We have jurisdiction under 26

U.S.C. § 7482(a)(1).

The current dispute has increased meaning because of the AMT’s treatment

of attorney fees. If the AMT did not apply, any fees Petitioner paid to her

attorneys would qualify as a deductible expense. However, under the AMT’s

provisions, certain miscellaneous deductions, including attorney fees, are

eliminated.

Petitioner argues that the Internal Revenue Code does not require that the

payment made to her attorneys be included in her income. Section 61(a) of the

Code defines gross income as “all income from whatever source derived.” 26

U.S.C. § 61(a). The $150,000 she recovered in her Title VII suit clearly

constitutes income from “whatever source derived.”

We reject Petitioner’s argument that she lacked the requisite control and

beneficial ownership of the funds paid directly to her attorney. Regardless of the

label placed on the contract between Petitioner and her attorneys, the end result is

that the recovery of legal fees benefitted her. This recovery permitted Petitioner

to discharge the personal obligation owed to her attorneys. See Coady v.

Commissioner, 213 F.3d 1187, 1191 (9th Cir. 2000); Baylin v. United States, 43

F.3d 1451, 1454 (Fed. Cir. 1995).

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 Petitioner’s argument that the effect of her contingent fee agreement and

the Missouri lien statute alters the analysis is equally unavailing. Petitioner

points to rulings in other circuits holding that contingent fees paid directly to

attorneys are not taxable income based on the applicable attorney lien statutes.

See, e.g., Foster v. United States, 249 F.3d 1275 (11th Cir. 2001) (Alabama

statute); Estate of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000)

(Michigan statute); Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959)

(Alabama statute). However, the majority of the circuits have rejected this

argument. See, e.g., Kenseth v. Commissioner, 259 F.3d 881 (7th Cir. 2001)

(Wisconsin statute); Young v. Commissioner, 240 F.3d 369 (4th Cir. 2001) (North

Carolina statute); Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir.

2000) (California statute); Coady v. Commissioner, 213 F.3d 1187 (9th Cir. 2000)

(Alaska statute); Baylin v. Maryland, 43 F.3d 1451 (Fed. Cir. 1995) (Maryland

statute).

Furthermore, the cases Petitioner relies upon are readily distinguished. As

the Tax Court correctly noted, the Missouri lien statute, unlike the Alabama and

Michigan statutes, does not create a proprietary interest in the recovery on the

attorney’s behalf. Instead, the Missouri statute simply operates as a manner of

ensuring payment to the attorney. As the Seventh Circuit recently observed, an

attorney with a lien on settlement “is no different in this respect from any other

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trade creditor stiffed by his debtor.” Kenseth, 259 F.3d at 884.

Petitioner urges us to adopt a uniform standard that contingent fee

payments made directly to attorneys for their services should not be taxable to

successful plaintiffs. She advocates a standard independent of “the intricacies of

an attorney’s bundle of rights against the opposing party under the law of the

governing state.” Aplt. Brief at 25 (quoting Srivastava v. Commissioner, 220

F.3d 353, 364 (5th Cir. 2000). Her reliance on Srivastava is misplaced. In

Srivastava, the Fifth Circuit specifically stated, “[W]ere we to decide this case as

an original matter, we might apply the anticipatory assignment doctrine to hold

that contingent fees are gross income to the client. We do not, however, decide

this case on a clean slate, but must follow the contrary approach endorsed in

Cotnam.” Srivastava, 220 F.3d at 363. Not only has the Fifth Circuit’s ruling in

Srivastava been widely criticized, see, e.g., Benjamin C. Rasmussen, Note,

Taxation of an Attorney’s Contingency Fee of a Punitive Damages Recovery: The

Srivastava Approach, 15 BYU J. Pub. L. 301 (2001), but we, unlike the Fifth

Circuit, decide this case on a clean slate.

We agree with Petitioner that a universal standard independent of the

“intricacies of any attorney’s bundle of rights,” or the unique provisions of a

particular state’s attorney lien statute is desirable. However, her proposed

solution is inconsistent with the Tax Code. The correct approach is much more

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simple. Petitioner’s judgment is a recovery of lost income; the attorney fees she

paid represent expenses incurred in generating that income. Like any other

taxpayer, Petitioner must report the entire amount as gross income, and, but for

the AMT’s provisions, she would be allowed to deduct her attorney fees as an

expense. The Tax Code mandates this result irrespective of a particular state’s

attorney lien statute’s provisions.

Finally, Petitioner invites us to judicially overturn what she terms an

“anomalous and unjust result” created by the application of the AMT to the

present case. We must reject this invitation. The perceived inequities of the

AMT are simply not at issue here. Congress, not this court, must correct any

shortcomings in the AMT’s application.

The Tax Court’s decision is AFFIRMED.

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