Hukkanen-Campbell v. Comm. of Internal Revenue, HUKKANEN-CAMPBEL

• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Citation: 274 F.3d 1312
• Docket Number: No. 00-9030,HUKKANEN-CAMPBEL,P,00-9030
• Parties: (10th Cir. 2001) NANCY J.etitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee
• Decision Date: 19 December 2001

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274 F.3d 1312 (10th Cir. 2001) NANCY J. HUKKANEN-CAMPBELL, Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee. No. 00-9030 UNITED STATES COURT OF APPEALS TENTH CIRCUIT December 19, 2001

APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT (T.C. Docket No. 12371-98 )

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Russell R. Young (Roger J. Jones with him on the briefs) of Mayer, Brown & Platt, Chicago, Illinois, for Petitioner-Appellant.

Tamara W. Ashford (Richard Farber and Kenneth W. Rosenberg on the brief), Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.

Before KELLY and McKAY, Circuit Judges, and BROWN, Senior District Judge.^*

McKAY, Circuit Judge.

Petitioner prevailed in a Title VII lawsuit against her former employer. The defendant in that action paid Petitioner $150,000 in partial satisfaction of the judgment. The $150,000 payment was issued jointly to Petitioner and her attorneys. She received $76,600.75 of the settlement; her attorneys retained the remaining $73,399.25 as legal fees.

Originally, Petitioner reported the entire $150,000 as "Other Income" on her 1993 federal income tax return. She also claimed an itemized deduction for the legal fees. In 1995, she filed an amended tax return in which she excluded the $150,000 payment from her income entirely, claiming a refund of $20,075. The Commissioner denied the refund and issued to her a deficiency notice in the amount of $17,402. This deficiency resulted from the application of the Alternative Minimum Tax ("AMT"). The AMT precludes various miscellaneous itemized deductions including fees paid to attorneys by taxpayers.

Petitioner challenged the deficiency in Tax Court arguing that the proceeds of the lawsuit were excluded from income under 104(a)(2). Alternatively, she argued that the portion paid to her attorneys pursuant to her contingent fee arrangement was not includable in gross income. The Tax Court held that the entire $150,000 was subject to taxation and that the amount paid to her attorneys qualified as a miscellaneous itemized deduction. However, since the computation of the AMT disallows deductions for attorney fees, the Tax Court upheld the $17,402 deficiency. Petitioner timely appealed. We have jurisdiction under 26 U.S.C. 7482(a)(1).

The current dispute has increased meaning because of the AMT's treatment of attorney fees. If the AMT did not apply, any fees Petitioner paid to her attorneys would qualify as a deductible expense. However, under the AMT's provisions, certain miscellaneous deductions, including attorney fees, are eliminated.

Petitioner argues that the Internal Revenue Code does not require that the payment made to her attorneys be included in her income. Section 61(a) of the Code defines gross income as "all income from whatever source derived." 26 U.S.C. 61(a). The $150,000 she recovered in her Title VII suit clearly constitutes income from "whatever source derived."

We reject Petitioner's argument that she lacked the requisite control and beneficial ownership of the funds paid directly to her attorney. Regardless of the label placed on the contract between Petitioner and her attorneys, the end result is that the recovery of legal fees benefitted her. This recovery permitted Petitioner to discharge the personal obligation owed to

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