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holding, proceeds of a judgment or settlement which would be
includable in the taxpayer’s income if paid directly to the
taxpayer, and which are instead paid to a taxpayer’s attorney
pursuant to an attorney contingent fee agreement are income to
the taxpayer. Kenseth v. Commissioner, supra. The Court of
Appeals for the Seventh Circuit recently affirmed this holding.
Kenseth v. Commissioner, 259 F.3d 881 (7th Cir. 2001).
We recognize that there is a split among the Courts of
Appeals on this question. The Court of Appeals for the Fifth
Circuit, in Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959),
affg. in part and revg. in part 28 T.C. 947 (1957), held that an
attorney’s lien under Alabama law provided the attorney with a
property right in the lawsuit. Therefore, the court held that
the proceeds paid directly to the attorney pursuant to a
contingent fee agreement constituted the attorney’s property and
were not income to the taxpayer. The Court of Appeals for the
Sixth Circuit, on a somewhat different theory, held that fees
paid to an attorney under a contingent fee agreement are not
income to the taxpayer. Estate of Clarks ex rel. Brisco-Whitter
v. United States, 202 F.3d 854 (6th Cir. 2000). On the other
hand, the Courts of Appeals for the Third, Seventh, Ninth and
Fourth Circuits have disagreed with the Fifth and Sixth Circuit’s
reasoning. Kenseth v. Commissioner, 259 F.3d 881 (7th Cir.
2001); Young v. Commissioner, 240 F.3d 369 (4th Cir. 2001), affg.
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