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As such, we agree with respondent’s position in that the
noneconomic damages were the only damages excludable under
section 104(a)(2). Petitioner must include his economic and
punitive damages within his gross income for taxable year 1995.
II. Attorney Contingent Fee Agreements
Petitioner also seeks to exclude from his gross income
$3,864,012, the portion of the settlement BCal paid directly to
Merten, his attorney, pursuant to the two contingent fee
agreements. Here again, we consider the broad reach of section
61 and whether, under some theory, the amount paid to
petitioner’s attorney should be excluded from gross income.
Numerous taxpayers have attempted to find some approach for
excluding from income the portion paid to their attorneys from
judgment or settlement damages. This Court has not approved any
such approach except where the case was appealable to a Court of
Appeals with a contrary view.
This Court in Kenseth v. Commissioner, 114 T.C. 399 (2000),
affd. 259 F.3d 881 (7th Cir. 2001), held that a contingent fee
agreement did not result in an excludable assignment of income
from the taxpayer. See Helvering v. Horst, 311 U.S. 112 (1940);
Lucas v. Earl, 281 U.S. 111 (1930). In addition, we observed
that the right created in an attorney pursuant to a contingent
fee agreement was the right to be paid for services rendered--a
right created in any creditor-debtor relationship. Under this
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