- 45 -
F.3d 854 (6th Cir. 2000), revg. 98-2 USTC par. 50,868, 82 AFTR 2d
7068 (E.D. Mich. 1998), impelled me to ride the case at hand as
the vehicle to reexamine the Tax Court’s treatment of contingent
fees paid to obtain taxable recoveries. Although this case is
not the most egregious recent example, the mechanical interplay
of the itemized deduction rules with the AMT can result--in cases
in which the contingent fee exceeds 50 percent of the recovery--
in an overall effective rate of Federal income tax and AMT on the
net recovery exceeding 50 percent;16 in cases in which the
aggregate fees exceed 72-73 percent of the recovery, the tax can
exceed the net recovery, resulting in an overall effective rate
of tax that exceeds 100 percent of the net recovery.17
16 Coady v. Commissioner, T.C. Memo. 1998-291, on appeal
to the Court of Appeals for the Ninth Circuit, may be a case in
point. The contingent fee and costs approximated 60 percent of
the recovery.
The alternative provision for using the enhanced hourly rate
schedule to calculate the legal fee under Section III of Mr.
Kenseth’s contingent fee agreement could result, in a case in
which the recovery is small relative to the time spent on the
case by the attorneys, in a fee substantially greater than the
40-46 percent contingent fee provided by the agreement. It
should be kept in mind that the enhanced hourly rate provision
was an alternative method of computing the contingent fee, not a
provision for an hourly rate that was payable in all events for
which the client was personally liable, as in Bagley v.
Commissioner, 105 T.C. 396 (1995), affd. on other issues 121 F.3d
393 (8th Cir. 1997), and Estate of Gadlow v. Commissioner, 50
T.C. 975 (1968).
17 Because of the resulting exposure to two sets of fees,
the lien provisions of contingent fee agreements are a
substantial impediment to replacing original attorneys. These
situations contain the potential, if the total contingent fees
(continued...)
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