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We next address petitioner’s argument that the portion of
the settlement proceeds retained by her attorney should not be
included in her gross income. This Court has consistently held
that “taxable recoveries in lawsuits are gross income in their
entirety to the party-client and that associated legal fees--
contingent or otherwise--are to be treated as deductions.”
Kenseth v. Commissioner, 114 T.C. 399, 411 (2000), affd. 259 F.3d
881 (7th Cir. 2001). While there is a split of authority among
the Federal Courts of Appeals as to whether certain contingent
fees may be excludable from the client’s income under the laws of
certain States, in Kenseth v. Commissioner, supra, this Court has
concluded that we will continue to adhere to our holding in
O’Brien v. Commissioner, 38 T.C. 707 (1962), affd. per curiam 319
F.2d 532 (3d Cir. 1963), that contingent fee agreements “come
within the ambit of the assignment of income doctrine and do not
serve, for purposes of Federal taxation, to exclude the fee from
the assignor’s gross income.” Kenseth v. Commissioner, supra at
412. Furthermore, the Court of Appeals for the Ninth Circuit3
2(...continued)
order of the injury and emotional distress didn’t matter.” That
case, in which the court held that psychological injury which
results in physical injury is within the scope of the Federal
Employees’ Compensation Act, 5 U.S.C. ch. 5 (2000), has no
application with respect to the provisions of sec. 104(a)(2) of
the Internal Revenue Code.
3But for the provisions of sec. 7463(b), the decision in
this case would be appealable to the U.S. Court of Appeals for
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