Benci-Woodward v. Comm'r of Internal Revenue
| Decision Date | 08 June 2000 |
| Docket Number | P,BENCI-WOODWARD and DEBRA,Nos. 99-70136,99-70138,99-70137,BENCI-WOODWAR,s. 99-70136 |
| Citation | 219 F.3d 941 |
| Parties | (9th Cir. 2000) IVOR F.A.etitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. LAURENTZ J. MANGUM and BARBARA MANGUM, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. JOSE RAGATZ and DIANNE M. RAGATZ, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Office of the Circuit Executive |
| Court | U.S. Court of Appeals — Ninth Circuit |
Philip Garrett Panitz and Ryan D. Schapp, Law Offices of Philip Garrett Panitz, Westlake Village, California, for the petitioners.
Teresa E. McLaughlin and Tamara W. Ashford, Tax Division, Department of Justice, for the respondent.
Appeals from the United States Tax Court, Arthur L. Nims, III, Tax Court Judge, Presiding; Tax Ct. No. 3769-96, No. 4185-96, No. 8265-96
Before: Stephen S. Trott, Ferdinand F. Fernandez, and M. Margaret McKeown, Circuit Judges.
The question before us is whether the taxpayers may exclude from gross income the portion of a punitive damages award retained by their attorney pursuant to a contingent fee agreement. The answer is no and is dictated by our recent case of Coady v. Commissioner, 213 F.3d 1187 (9th Cir. June 14, 2000). Although Coady involved analysis of an attorney lien under Alaska law, the result is the same under California law. We have jurisdiction pursuant to 26 U.S.C. S 7482(a)(1), and we affirm the decision of the Tax Court.
Petitioners, who were employees of Target Stores, filed a lawsuit in California state court against Dayton-Hudson, Inc. (of which Target is a division) and Dana Pereau. The complaint, stemming from events arising out of an employer investigation, alleged false imprisonment, defamation, intentional infliction of emotional distress, wrongful discharge in violation of public policy, breach of an implied-in-fact employment contract, breach of the implied covenant of good faith and fair dealing, constructive discharge, and intentional misrepresentations. In connection with their legal representation, Petitioners entered into a Retainer Agreement with their attorney that provided for a contingent fee arrangement and that gave him a lien on any recovery in the case.
Following trial, a jury returned a verdict in favor of Petitioners. The award included both compensatory and punitive damages. Petitioners did not initially report their punitive damages award as taxable income, but have since conceded that the portion of those damages retained by them is includable in gross income. They argued, however, that the portion of the punitive damages retained by their attorney as fees and costs should be excluded from gross income. The Tax Court disagreed, ruling that all of the punitive damages were fully includable in Petitioners' gross income without an offset for attorney fees and costs. The Tax Court further ruled that, as miscellaneous itemized deductions, the contingent fees are subject to disallowance as a result of the application of the Alternative Minimum Tax ("AMT").
We review de novo the Tax Court's conclusions of law. Ferguson v. Commissioner, 174 F.3d 997, 1001 (9th Cir. 1999). Under California law, an attorney lien does not confer any ownership interest upon attorneys or grant attorneys any right and power over the suits, judgments, or decrees of their clients. The California Supreme Court explained that
in whatever terms one characterizes an attorney's lien under a contingent fee contract, it is no more than a security interest in the proceeds of the litigation. . . . While there is occasional language in cases in the effect that the attorney also becomes the equi table owner of a share of the client's cause of action, we stated more accurately in Fifield Manor v. Fins ton (1960) 54 Cal. 2d 632, 641, 7 Cal. Rptr. 377, 383, 354 P.2d 1073, 1079, 78 A.L.R.2d 813, that contingent fee contracts "do not operate to transfer a part of the cause of action to the attorney but only give him a lien upon his client's recovery."
* * *
[T]he conclusion emerges that in litigation an attor ney conducts for a client he acquires no more than a professional interest. To hold that a contingent fee contract or any "assignment" or "lien" created thereby gives the attorney the beneficial rights of a real party in interest, with the concomitant personal responsibility of financing the litigation, would be to demean his profession and distort the purpose of the various acceptable methods of securing his fee.
Isrin v. Superior Court, 403 P.2d 728, 732, 733 (Cal. 1965); see also id. at 734 (); Cooper v. Equity Gen. Ins., 219 Cal. App. 3d 1252, 1260 (1990) (). Cf. Estate of Clarks v. United States, 202 F.3d 854, 857-58 (6th Cir. 2000) ().
In light of California law, our holding here--that the attorney fee portion of the punitive damages recovery is taxable to Petitioners--is compelled by our analysis in Coady. See 213 F.3d at 1190 (...
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