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attorney’s fees, determining that the attorney’s fees constituted
a capital expenditure and could, therefore, not reduce ordinary
income.
The Court of Federal Claims agreed with the Government. On
appeal, the taxpayer argued that the portion of the recovery used
to pay attorney’s fees was never a part of the partnership’s
gross income and should be excluded from gross income. The
Federal Circuit, rejecting the taxpayer’s argument, held that
even though the partnership did not take possession of the funds
that were paid to the attorney, it “received the benefit of those
funds in that the funds served to discharge the obligation of the
partnership owing to the attorney as a result of the attorney’s
efforts to increase the settlement amount.” Id. at 1454. The
Court of Appeals for the Federal Circuit sought to prohibit
taxpayers in contingency fee cases from avoiding Federal income
tax with “skillfully devised” fee agreements. See id.
The U.S. Court of Appeals for the Ninth Circuit reached the
same result as the court in Baylin regarding the includability of
attorney’s fees in a taxpayer’s gross income. In Brewer v.
Commissioner, 172 F.3d 875 (9th Cir. 1999), affg. without
published opinion T.C. Memo. 1997-542, the Court of Appeals
affirmed the Tax Court decision holding that the portion of a
Title VII settlement that was paid directly to the taxpayer’s
attorney was not excludable from the taxpayer’s gross income.
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