- 58 -
otherwise negligible income against which to deduct the fee,
resulting in a deficiency of more than $36,000.33
The Tax Court first held that the recovery was compensation
income rather than a nontaxable bequest; on this issue the Court
of Appeals for the Fifth Circuit unanimously affirmed. On the
second question, whether the contingent legal fee was excluded
from the compensation to be spread back or merely a useless
deduction in the year of receipt by the attorneys, Judge Wisdom,
writing for the panel, made clear that he disagreed with the
outcome in the taxpayer’s favor, stating as follows:
A majority of the Court, Judges Rives and Brown,
hold that the $50,365.83 paid Mrs. Cotnam’s attorneys
should not be included in her gross income. This sum
was income to the attorneys but not to Mrs. Cotnam.
* * * * * * *
The facts in this unusual case, taken with the
Alabama statute, put the taxpayer in a position where
she did not realize income as to her attorneys’
interests of 40% in her cause of action and judgment.
[Cotnam v. Commissioner, 263 F.2d at 125.]
33 Because of the high marginal rates of Federal income tax
in effect in 1940-44 and 1948, inclusion of the gross recovery in
1948 income and allowance of the deduction in that year would
have resulted in a greater deficiency than that arising under the
apportionment of the gross income over the prior years under 1939
Code sec. 107, even if the fee were treated as a deduction or
offset for 1948. The taxpayer was arguing for even greater
relief, that the compensation received in 1948 and apportioned
under sec. 107 over the earlier years should be reduced by the
legal fee.
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