Kenseth v. Comm'r of Internal Revenue

• Decision Date: 24 May 2000
• Docket Number: No. 2385–98.,2385–98.
• Citation: 114 T.C. 399,82 Fair Empl.Prac.Cas. (BNA) 1512,114 T.C. No. 26
• Parties: Eldon R. KENSETH and Susan M. Kenseth, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

114 T.C. 399

114 T.C. No. 26

82 Fair Empl.Prac.Cas. (BNA) 1512

Eldon R. KENSETH and Susan M. Kenseth, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 2385–98.

United States Tax Court.

May 24, 2000.

Taxpayers petitioned for redetermination of deficiencies arising from inclusion in gross income of portion of settlement proceeds of federal age discrimination claim that was paid as attorney fees pursuant to contingent fee agreement. The Tax Court, Ruwe, J., held that entire award was includable in gross income.

Decision for IRS.

Judgment affirmed, 259 F.3d 881.

Chabot, J., dissented in written opinion, in which Parr, Wells, Colvin, and Beghe, JJ., joined.

Beghe, J., dissented in written opinion. In 1993, P recovered a $229,501 settlement under the Federal Age Discrimination in Employment Act of 1967, Pub.L. 90–202, sec. 2, 81 Stat. 602, current version at 29 U.S.C. secs. 621–633a (1994). A portion of the settlement proceeds was deposited in the trust account of P's attorney, X. In distributing the settlement proceeds, X retained $91,800 in attorney's fees pursuant to a contingent fee agreement. The remaining amount was paid to P. P excluded the settlement proceeds designated as personal injury damages under the settlement agreement. R determined that the entire $229,501 recovered was includable in gross income but allowed the attorney's fees paid as a miscellaneous itemized deduction. P concedes that the settlement proceeds are not excludable in their entirety but contends that the amount allocable to attorney's fees should be excluded from gross income.Held, the amount retained by X for attorney's fees is includable in P's gross income for 1993 under the assignment of income doctrine. This Court respectfully declines to follow the reasoning of the Federal Courts of Appeals in Estate of Clarks v. United States, 202 F.3d 854 (6th Cir.2000), and Cotnam v. Commissioner, 263 F.2d 119 (5th Cir.1959), revg. in part and affg. in part 28 T.C. 947, 1957 WL 1117 (1957).Cheryl R. Frank, Chaya Kundra, and Gerald W. Kelly, Jr., for petitioners.

George W. Bezold, for respondent.

RUWE, J.^*

Respondent determined a deficiency of $55,037 in petitioners' 1993 Federal income tax. The sole issue for decision is whether petitioners' gross income includes the portion of the settlement proceeds of a Federal age discrimination claim that was paid as the attorney's fees of Eldon R. Kenseth (petitioner) pursuant to a contingent fee agreement.

FINDINGS OF FACT

The parties have stipulated some of the facts, and the stipulations of facts and the attached exhibits are incorporated in this opinion. At the time of filing their petition, petitioners resided in Cambridge, Wisconsin.

In a complaint filed with the Wisconsin Department of Industry, Labor, and Human Relations (DILHR) in October 1991, petitioner alleged that on March 27, 1991, APV Crepaco, Inc. (APV), terminated his employment. The complaint also alleged that, at the time of his discharge, petitioner was 45 years old, held the position of master scheduler, was earning $33,480 per year, and had been employed by APV for 21 years. It further alleged that, around the time of petitioner's discharge, APV did not terminate younger employees also acting as master schedulers but did terminate other employees over age 40.

Prior to filing the DILHR complaint, petitioner and 16 other former employees of APV (the class) retained the law firm of Fox & Fox, S.C. (Fox & Fox), to seek redress against APV. In July 1991, petitioner executed a contingent fee agreement with Fox & Fox that provided for legal representation in his case against APV. Each member of the class entered into an identical contingent fee agreement with Fox & Fox.

The contingent fee agreement was a form contract prepared and routinely used by Fox & Fox; the client's name was manually typed in, but the names of Fox & Fox and APV had already been included in preparing the form used for all the class members. Fox & Fox would have declined to represent petitioner if he had not entered into the contingent fee agreement and agreed to the attorney's lien provided therein.

The contingent fee agreement provided in relevant part: ¹

FOX & FOX, S.C.

CONTINGENT FEE AGREEMENT: (Case involving Statutory Fees)

* * *

II. CLIENT TO PAY LITIGATION EXPENSES

The client will pay all expenses incurred in connection with the case, including charges for transcripts, witness fees, mileage, service of process, filing fees, long distance telephone calls, reproduction costs, investigation fees, expert witness fees and all other expenses and out-of-pocket disbursements for these expenses according to the billing policies and procedures of FOX & FOX, S.C. The client agrees to make payments against these bills in accordance with the firm's billing policies.

III. THE ATTORNEYS' FEES WHERE THERE IS NO SEPARATE PAYMENT OF ATTORNEYS' FEES

In the event that there is recovered in the case a single sum of money or property including a job that can be valued in monetary advantage to the client, either by settlement or by litigation, the attorneys' fees shall be the greater of:

A. A reasonable attorney's fee in a contingent case, which shall be defined as the attorneys' fees computed at their regular hourly rates, plus accrued interest at their regular rate, plus a risk enhancer of 100% of the regular hourly rates (but in no event greater than the total recovery), or:

B. A contingency fee, which shall be defined as:

Forty percent (40%) of the recovery if it is recovered before any appeal is taken;

Forty–Six percent (46%) of the recovery if it is recovered after an appeal is taken.

Any settlement offer of a fixed sum which includes a division proposed by the offeror between damages and attorneys' fees shall be treated by the client and the attorneys as an offer of a single sum of money and, if accepted, shall be treated as the recovery of a single sum of money to be apportioned between the client and the attorneys according to this section. Any division of such an offer into damages and attorneys' fees shall be completely disregarded by the client and the attorneys.

* * *

VI. CLIENT NOT TO SETTLE WITHOUT ATTORNEYS' CONSENT

The client will not compromise or settle the case without the written consent of the attorneys. The client agrees not to waive the right to attorneys' fees as part of a settlement unless the client has reached an agreement with the attorney for an alternative method of payment that would compensate the attorneys in accordance with Section III of this agreement.

VII. WIN OR LOSE RETAINER

The client agrees to pay a Five Hundred ($500.00) Dollar win or lose retainer. This amount will be credited to the attorney fees set forth in Section III in the event a recovery is made. If no recovery is made, this amount is non-refundable to the client.

VIII. LIEN

The client agrees that the attorney shall have a lien against any damages, proceeds, costs and fees recovered in the client's action for the fees and costs due the attorney under this agreement and said lien shall be satisfied before or concurrent with the dispersal of any such proceeds and fees.

IX. CHANGE OF ATTORNEY

In the event the client chooses to terminate the contract for legal services with Fox & Fox, S.C., said firm will have a lien upon any recovery eventually obtained. Said lien will be for the fees set forth in Section III of this agreement.

In the event the client chooses to terminate the contract for legal services with Fox & Fox, S.C., the client will further make immediate payment of all outstanding costs and disbursements to the firm of Fox & Fox, S.C. and will do so within ten (10) days of the termination of the contract.

In entering into this contract Fox & Fox, S.C. has relied on the factual representations made to the firm by the client. In the event such representations are intentionally false, Fox & Fox, S.C. reserves the right to unilaterally terminate this agreement and to charge the client for services to the date of termination rendered on an hourly basis plus all costs dispersed and said amount shall be due within ten (10) days of termination.

At the time of entering into the contingent fee agreement, petitioner had paid only the $500 “win or lose” retainer to Fox & Fox. This amount was to be credited against the contingent fee that would be payable if there should be a recovery on the claim; if there should be no recovery, this amount was nonrefundable. Under section II of the agreement, petitioner expressly agreed to reimburse Fox & Fox for out-of-pocket expenses, in accordance with the firm's normal billing policies and procedures. In contrast, under section III of the agreement (which set forth the contingent fee agreement), petitioner did not expressly agree to pay anything. Instead, section III provided how the amount of the contingent fee was to be calculated if there should be a recovery. Other sections of the agreement summarized below provided for the attorney's lien.

The contingent fee agreement required aggregation of the elements of any settlement offer divided between damages and attorney's fees and provided that any division of such an offer into damages and attorney's fees would be disregarded by Fox & Fox and petitioner. The contingent fee agreement provided that petitioner could not settle his case against APV without the consent of Fox & Fox. Under the contingent fee agreement, petitioner agreed that Fox & Fox “shall have a lien” for its fees and costs against any recovery in petitioner's action against APV. This lien by its terms was to be satisfied before or concurrently with the disbursement of the recovery. The contingent fee agreement further provided that, if petitioner should terminate his representation by Fox & Fox, the firm would have a lien for the fees set forth in section III of the agreement, and all costs and disbursements that had been expended by Fox & Fox would become due and payable by petitioner within 10 days of...