-22-
3. Analysis
In Commissioner v. Banks, supra, the Supreme Court
consolidated the cases of taxpayers John W. Banks II and Sigitas
J. Banaitis. Mr. Banks had retained an attorney on a contingent
fee basis and had filed a civil suit against his employer
alleging employment discrimination under Federal and State law.
Id. at ___, 125 S. Ct. at 829. Mr. Banaitis had retained an
attorney on a contingent fee basis and had filed a civil suit
against his employer alleging willful interference with his
employment contract and wrongful termination. Id. at ___, 125 S.
Ct. at 830. Both taxpayers settled their claims, and neither
taxpayer included the amount of settlement proceeds paid to his
attorney in his gross income. Id. at ___, 125 S. Ct. at 829-830.
The Commissioner issued to each taxpayer a notice of deficiency
in which the Commissioner determined that the amount paid to the
taxpayer’s attorney as a contingent fee was includable in the
taxpayer’s income, and each taxpayer contested the determination.
Id. Relying on the facts that the taxpayers retained control
over their legal claims (income-generating assets), diverted some
of the settlement amount to their attorneys through their
respective contingent fee agreements, and realized a consequent
benefit, the Supreme Court decided that each taxpayer must
include in his gross income the portion of the settlement amount
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