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With respect to Baylin, the majority opinion says: “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.” Majority op. p.
18. This language from Lucas v. Earl, which had to do with
protecting the progressive rate structure, obviously has no
bearing on latter-day contingent fee arrangements. I also
disagree with Baylin’s in effect applying Old Colony Trust Co. to
treat the fee, which becomes the lawyer’s share of the realized
claim, as an amount realized by the client that is properly
included in the sum of satisfactions procured by the client.
Even though the lawyer may not obtain legal ownership of the
claim, there is no denying that the lawyer acquires a substantial
economic interest in the ultimate recovery.
The majority opinion cites Brewer v. Commissioner, 172 F.3d
875 (9th Cir. 1999), affg. without published opinion T.C. Memo.
1997-542, as if it were substantial authority. Both the
unpublished opinion of the Court of Appeals and this Court’s
58(...continued)
with a zero basis on which the taxpayer realized deferred income
or gain in the year of the recovery under the open transaction
theory. This argument really is nothing more than a restatement
of the anti-assignment of income argument that begs the question.
The question unanswered by the Justice Department and the
Commissioner is whether the taxpayer is entitled to treat the
contingent fee as a cost of obtaining the total recovery or an
offset that must be taken into account in computing gross income,
rather than including the entire recovery in gross income and
taking a separate deduction for the fee.
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