Eldon R. Kenseth and Susan M. Kenseth - Page 45

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         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                

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