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gross income under section 104(a)(2) because the underlying
cause of action giving rise to the recovery was based
entirely upon a contract cause of action and not upon tort
or tortlike rights as required by section 1.104-1(c),
Income Tax Regs. See Commissioner v. Schleier, 515 U.S.
323 (1995).
Whether Petitioners May Exclude From Gross Income a Portion
of the Recovery Equal to the Amount Paid to Their Attorneys
Under the Contingent Fee Agreement
Petitioners argue that if we hold that section
104(a)(2) does not apply, with the result that the judgment
proceeds are includable in their 1994 gross income, then
the portion of the judgment paid directly to their
attorneys under the retainer agreement is excludable from
gross income. Petitioners ask us to follow Cotnam v.
Commissioner, 263 F.2d 119 (5th Cir. 1959), revg. in part
and affg. on another issue 28 T.C. 947 (1957), and Estate
of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000).
In Cotnam v. Commissioner, supra, the Court of Appeals for
the Fifth Circuit held that the amount of a contingent fee
paid to the taxpayer's attorneys out of a judgment was not
income to the taxpayer because under Alabama law a
contingent fee contract operates as a lien on the recovery
that, in effect, transfers part of a plaintiff's claim to
the attorneys. See also Srivastava v. Commissioner, 220
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