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interest in the taxpayer*s cause of action. Under that
reasoning, the Court of Appeals concluded that the attorney held
the same rights as the client with respect to the contingency fee
portion of the settlement and the taxpayer*s attorney, not the
taxpayer, realized the income with respect to the contingency
fee.
We need not analyze the validity of this argument. The
Supreme Court stated that regardless of whether State law
purported to give attorneys an “ownership” interest in their
fees, no State law of which it was aware converted the typical
principal-agent relationship between the client and attorney to a
partnership so that the contingency fee would not be taxable to
the client-principal. Commissioner v. Banks, supra (discussing
Cotnam v. Commissioner, supra at 125). Furthermore, because the
arguments were not advanced at earlier stages in the litigation,
the Court refused to address whether (1) the contingent-fee
arrangement established a subchapter K partnership, (2) the
attorney’s fee constituted a capital expense, or (3) the fee was
a deductible reimbursed employee business expense. Id.
Accordingly, Commissioner v. Banks dictates that the entire
amount of petitioners’ recovery is included in petitioners’
income.
Petitioners advance no arguments the Supreme Court did not
consider. Therefore, petitioners have received income in an
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Last modified: May 25, 2011