Sinyard v. Comm'r of Internal Revenue, PETITIONERS-APPELLANTS

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: Noonan; McKEOWN
• Citation: 268 F.3d 756
• Parties: (9th Cir. 2001) JAMES T. SINYARD; MONIQUE T. SINYARD,v. COMMISSIONER OF INTERNAL REVENUE,
• Docket Number: RESPONDENT-APPELLEE,PETITIONERS-APPELLANTS,No. 99-71369,99-71369
• Decision Date: 25 September 2001

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268 F.3d 756 (9th Cir. 2001) JAMES T. SINYARD; MONIQUE T. SINYARD, PETITIONERS-APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLEE No. 99-71369 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Argued and Submitted March 16, 2001
Filed September 25, 2001

Thomas H. Boyd, Winthrop & Weinstine, P.A., St. Paul, Minnesota, for the petitioners.

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Paula M. Junghans, Richard Farber, and Kenneth W. Rosenberg, United States Department of Justice, Tax Division, Washington, D.C., for the respondent.

Appeal from a Decision of the United States Tax Court Stephen J. Swift, Tax Court Judge, Presiding. Tax Ct. No. 11056-96

Before: Noonan, McKeown, and Wardlaw, Circuit Judges.

Opinion by Judge Noonan; Dissent by Judge McKeown

Noonan, Circuit Judge:

James T. Sinyard and his wife Monique T. Sinyard (the Sinyards) appeal the judgment of the Tax Court determining a deficiency in their income tax for the taxable year 1992. At issue is the taxpayer's liability for attorneys' fees paid pursuant to court order approving the settlement of two class actions brought under the Age Discrimination in Employment Act (the ADEA), 29 U.S.C. § 621 et seq. Holding that such fees paid on the taxpayer's behalf are income to the taxpayer, we affirm the judgment of the Tax Court.

FACTS

In the 1980's James Sinyard was the division manager in Mobile, Alabama of IDS Financial Services, Inc. (IDS). In 1987, at the age of 49, he was allegedly forced to resign. In March 1989, Sinyard joined two class action suits against IDS alleging age discrimination and other torts. Sinyard entered into an agreement with class action counsel, Winthrop & Weinstine, providing: "In the event of a recovery, Winthrop & Weinstine will be paid one third (1/3) of the amount you obtain in the lawsuit, whether by settlement or jury award."

In April 1990, the Equal Employment Opportunity Commission (the EEOC) intervened. In 1992, the suits were settled. IDS agreed to pay $35 million "in full and complete settlement of all claims as described in this Agreement and the exhibits hereto"; the payment was to be made "to the 32 individual plaintiffs, Mervyn Taylor, and Winthrop & Weinstine, P.A., their attorneys." After deducting costs and disbursements of $1.7 million the 32 individual plaintiffs agreed to allocate one-third of the remaining total settlement amount as compensation for tort injuries to the plaintiffs, to allocate one-third of the settlement amount as compensation for lost wages, and to "allocate one-third of the settlement amount for payment of attorneys' fees pursuant to 29 U.S.C.§ 626(b) and 29 U.S.C. § 216(b)." IDS agreed to pay the attorneys' fees plus amounts allocated to legal costs and disbursements "directly to Winthrop & Weinstine, P.A., or to an account designated by them." IDS agreed to withhold federal and state income taxes on the one-third of the settlement which was allocated as compensation for lost wages.

IDS also agreed to undertake various measures to ensure its compliance with the ADEA, such as training sessions for all managers and supervisors, and to make regular reports to the EEOC as to any division manager who resigned, retired, had been demoted or had been terminated. IDS agreed to instruct all IDS personnel about the importance of avoiding age discrimination and, in particular, to avoid the use of such code words as "new blood" or "young turks" on the one hand, or "over the hill" or "behind the times," on the other. The settlement agreement was contingent upon approval by the court.

On August 26, 1992, the federal district court in which the suits were pending approved the settlement and issued the order drafted by the parties allocating one-third

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of the settlement to "attorneys' fees recoverable pursuant to 29 U.S.C. § 626(b) and 29 U.S.C. § 216(b)," to be paid directly without withholding for taxes, to Winthrop & Weinstine.

In accordance with the settlement, the proceeds were allocated as follows:

Total settlement payment $35,000,000
                Less costs and disbursements $1,500,000
                Net settlement proceeds $33,500,000
                

Allocation of net settlement proceeds:

Attorneys' fees (1/3) $11,166,666.65
                Tort damages $12,616,666.70
                Lost wages $11,166,666.65
                

IDS issued a single check to Winthrop & Weinstine for $23,783,333.35, the sum of the tort damages and the attorneys' fees. The check was deposited in a trust account on behalf of the class action plaintiffs.

PROCEEDINGS

The Commissioner of Internal Revenue assessed a deficiency in the Sinyards' 1992 tax return. They petitioned the Tax Court to deny the deficiency. The case was tried on stipulated facts. October 7, 1998 the Tax Court sustained the Commissioner, holding that payment of a portion of the legal fees to Winthrop & Weinstine had satisfied an obligation of James Sinyard.

The amount received in settlement by him that is not now in dispute was as follows:

$273,573 taxable back wages
                164,144 taxable tort damages
                109,429 nontaxable personal injury damages
                $547,146
                

In addition, legal fees and costs of $63,152 were allocated to the nontaxed personal injury damages and by agreement with the Commissioner excluded from income.

The Commissioner maintains that $252,608 in attorneys' fees should be treated as income to the Sinyards. The Commissioner held this amount allowable as a miscellaneous itemized deduction. This deduction was reduced by 2% of Adjusted Gross Income, leaving a deduction of $240,984 for the attorneys' fees. The full amount of this deduction could not be taken because the Sinyards' income was subject to the Alternative Minimum Tax (the AMT). The result was the deficiency upheld by the Tax Court.

The Sinyards appeal.

ANALYSIS

If A owes B a debt, and C pays the debt on A's behalf, it is elementary that C's payment is income to A as well as to B. Here, James Sinyard had contracted to pay Winthrop & Weinstine one-third of what he might receive in settlement. His obligation to the law firm was satisfied by IDS. The payment was therefore income to him. "The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929).

The Sinyards maintain their case is different. It is one where A owes B but C is liable to B for the same debt and indeed is primarily liable. When C satisfies his obligation to B, C's payment arguably should not be treated as income to A. In the present case, IDS became liable to pay the attorneys' fees. It did so by virtue of the order of the court confirming the settlement and ordering IDS to perform according to its terms. IDS became primarily liable for the debt to Winthrop & Weinstine. When IDS discharged the debt it was bound to pay, the Sinyards say they received no income.

The Sinyards have scoured the reports to find cases supporting their contention. What they have found, for example, are a corporation's arrangement to make payments to preserve its franchise, Tucker v. Commissioner, 226 F.2d 177 (8th Cir. 1955); a trust in lieu of alimony, Stern v.

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Commissioner, 137 F.2d 43 (2d Cir. 1943); and a corporation's settlement of a suit also affecting the taxpayer, Ruben v. Commissioner, 97 F.2d 926 (8th Cir. 1938). These cases rest on facts peculiar to themselves, in contexts very different from that provided by a fee-shifting statute. Although, as the Sinyards note, there are several hundred such statutes enacted by Congress, they present no precedent where the shift of the obligation to pay the lawyer from the lawyer's client to the defendant has relieved the client from the constructive receipt of income when his obligation to the lawyer is satisfied.

Indeed, the Sinyards' arguments are contrary to prior case law and the plain language of the ADEA statute. Under the ADEA, attorney's fees are available to prevailing plaintiffs, not to plaintiff's counsel. 29 U.S.C. § 626(b) (expressly incorporating provisions pertaining to attorney's fees under the Fair Labor Standards Act, 29 U.S.C. § 216(b)); see Evans v. Jeff D., 475 U.S. 717, 730-32 (1986) (holding that while Congress expected fee shifting to attract competent counsel to represent citizens deprived of their civil rights, it did not bestow fee awards upon attorneys). As the Supreme Court held in a civil rights case brought under 42 U.S.C.§ 1988, "it is the party, rather than the lawyer" who is eligible for fees under the fee-shifting statute. Venegas v. Mitchell, 495 U.S. 82, 87 (1990); Gilbrook v. City of Westminster , 177 F.3d 839, 874-75 (9th Cir. 1999) (recognizing that fee awards belong to the prevailing party under civil rights statute, 42 U.S.C. § 1988); Image Tech. Serv., Inc. v. Eastman Kodak Co., 136 F.3d 1354, 1357 (9th Cir. 1998) (holding that attorney fees awarded under the Clayton Act should be paid to the successful party itself).

In our case, the Sinyards bound themselves to pay Winthrop & Weinstine one-third of what they received. When IDS satisfied this obligation, the Sinyards were so much the richer. That they never laid hands on the money paid to the lawyers does not obliterate their constructive receipt. The Sinyards are therefore liable for the deficiency resulting from the workings of the AMT. Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000), cert denied, 531 U.S. 1112 (2001); Coady v. Commissioner, 213 F.3d 1187 (9th Cir. 2000), cert. denied, ___U.S.___, 121 S.Ct. 1604 (2001).

The Sinyards suggest that the ADEA is different from many fee-shifting statutes. The...