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We therefore push the analysis further by observing that our
conclusion accords with principles of Federal income taxation
developed by the Supreme Court in analogous situations.
Specifically, our treatment of the Thompson settlement is
analogous to the treatment of taxpayers who are held to have
received gross income, even though that income was paid directly
to a third party. Petitioners cite Old Colony Trust Co. v.
Commissioner, 279 U.S. 716 (1929), in which the Supreme Court
held that an employer’s payment of its employees’ income taxes
should be recognized as a taxable payment of additional
compensation to the employee.54
Our conclusion is supported by the recent decision of the
Supreme Court in Commissioner v. Banks, 543 U.S. 426 (2005).
There, Mr. Banks settled an employment discrimination suit for
$464,000 and, pursuant to a contingent fee arrangement, paid his
attorneys $150,000 of that amount. The Supreme Court held that
the $150,000 fee amount was includable in the gross income of Mr.
Banks, notwithstanding his preexisting obligation to pay
54We note that the Thompsons did not report as gross income
the first refund of $30,000, presumably because it was a refund
of tax they had previously paid. Moreover, they did not claim
that amount as a deduction under sec. 212(3) when they endorsed
the check for that amount to DeCastro, as a partial payment on
account of his legal fees. Although their failure to claim the
deduction operated as a tax detriment to the Thompsons, there is
no evidence that their forbearance was in any way related to the
deal with McWade.
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