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In a recent holding, the U.S. Court of Appeals for the Sixth
Circuit reached a result based on similar reasoning to that used
in Cotnam. See Estate of Clarks v. United States, 202 F.3d 854
(6th Cir. 2000). In Estate of Clarks, after a jury awarded the
taxpayer personal injury damages and interest, the judgment
debtor paid the taxpayer’s lawyer the amount called for in the
contingent fee agreement. Because the portion of the attorney’s
fee that was attributable to the recovery of taxable interest was
paid directly to the attorney, the taxpayer excluded that amount
from gross income on the estate’s Federal income tax return. The
Commissioner determined that the portion of the attorney’s fees
attributable to interest was deductible as a miscellaneous
itemized deduction and was not excludable from gross income. The
taxpayer paid the deficiency and sued for a refund in Federal
District Court.
The District Court granted summary judgment in favor of the
Government. The U.S. Court of Appeals for the Sixth Circuit
reversed, employing reasoning similar to that used in Cotnam.
The Court of Appeals held that, under Michigan law, the
taxpayer’s contingent fee agreement with the lawyer operated as a
lien on the portion of the judgment to be recovered and
transferred ownership of that portion of the judgment to the
attorney. The court seemed to place greater emphasis on the fact
that the taxpayer’s claim was speculative and dependent upon the
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