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approximately one-third of his total recovery to his lawyers.55
We read the Supreme Court’s opinion in Banks as confirming and
applying the general principle that the portion of a settlement
that is dedicated to the payment of the plaintiff’s attorney’s
contingent fee is still regarded as received by the plaintiff
even though he is not expected or entitled to retain it.
Our conclusion is guided also by the fact that the Court of
Appeals has specifically directed us to provide the equivalent of
the Thompson settlement as a sanction against respondent. We do
not believe that the Court of Appeals contemplated the
application of this aspect of the Thompson settlement in the way
that respondent urges, that is, as a 20-percent reduction in
proposed deficiencies, together with the hollow requirement that
respondent reimburse the many other affected petitioners for
attorney’s fees that in fact they never incurred. If we did so,
55We note that in Kenseth v. Commissioner, 114 T.C. 399
(2000), affd. 259 F.3d 881 (7th Cir. 2001), a majority of this
Court upheld respondent’s contention that the taxpayers were
chargeable with the receipt of gross income on the portion of a
settlement that was used to pay their attorney under a contingent
fee arrangement. In Kenseth, the taxable year was 1993, the
taxable year for which, in the matter at hand, respondent
contends that we should disregard as a formality the Thompsons’
receipt of the second refund they used to pay their attorney.
We observe that our hewing to the form of the transaction as
generating refunds of tax and interest to the Thompsons obviates
any argument by petitioners that the Thompsons received a tax
benefit in not being required to report as gross income the
receipt of the refund of tax that enabled them to make their
first installment payment of DeCastro’s attorney’s fees.
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