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Petitioners argue that their 1994 gross income does not
include the entire $373,307 award. According to petitioners,
$221,338 of the award is excluded from their gross income because
it was paid to Ms. Coady's counsel, HPC, under the contingent fee
agreement. Petitioners rely on Cotnam v. Commissioner, 263 F.2d
119 (5th Cir. 1959), revg. in part and affg. in part 28 T.C. 947
(1957).3 In the Cotnam case, the taxpayer had entered into a
contingent fee agreement with her attorneys, under which the
taxpayer agreed to pay the attorneys 40 percent of any amount
recovered on a claim that they prosecuted on her behalf. 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 they 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 Appeals for the Fifth
Circuit concluded that, under applicable State (Alabama) law, the
contingent fee agreement 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 to reach its conclusion:
2. Upon suits, judgments, and decrees for money,
* * * [attorneys] shall have a lien superior to all
3 See also Davis v. Commissioner, T.C. Memo. 1998-248
(following Cotnam as to the law of the circuit).
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