Amicus Curiae Brief — Commissioner v. Banks

iit % f .

Nos. 03-892 and 03-907 | AUG T5<

IN THE eric) or THES

Supreme Court of the United States

COMMISSIONER OF INTERNAL REVENUE,

Petitione:,

Vv.

JOHN W. BANKS, II,

Respondent.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

Vv.

SIGITAS J. BANAITIS,

Respondent.

On Writs of Certiorari

to the United States Courts of Appeals

for the Sixth and Ninth Circuits

BRIEF OF KENNETH W. GIDEON, MAXINE AARONSON,

GAIL RICHMOND, AND MONA L. HYMEL AS

AMICI CURIAE IN SUPPORT OF RESPONDENTS

KENNETH W. GIDEON*

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM LLP

1440 New York Ave., N.W.

Washington, D.C. 20005

(202) 371-7540

* Counsel of Record for Amici

{Additional Counsel listed inside front cover}

[Listing of Counsel continued from cover|

MANXINE AARONSON

3131 McKinney Ave.

Suite 420

Dallas. TX 75204

(213) 220-2050

GAIL RICHMOND

NOVA SOUTHEASTERN

UNIVERSITY, SHEPARD

BROAD LAW CENTER

3305 College Ave.

Fo: Lauderdale, FL 33314

(954) 262-6102

Mona L. HYMEL

UNIVERSITY OF ARIZONA,

JAMES E. ROGERS

COLLEGE OF LAW

P.O. Box 210176

Tucson, AZ 85721

(520) 621-3838

Counsel for Amici Curiae

TABLE OF CONTENTS

Page

Tee il

accent l

ata rrntcreeetienennenenenenents l

Argument ipaiieeneetennsiedteseensonsmnenascanensensesesnssessensesasenessesesesscsssesaed +

y The Internal Revenue Code Contains No

Provision Requiring That A Coniingent Fee

Paid To The Attorney For A Successful

Plaintiff Be Taxable To Both The Plaintiff

Lee 4

Il. The Assignment Of Income Doctrine Does

Not Require That A Plaintiff Be Taxe¢ On

Income He Did Not Earn Ar | Can Never

TET. 6

EE 12

il

TABLE OF AUTHORITIES

Page

CASES:

Alexander v. IRS, 72 F.3d 938 (1st Cir. 1995) ............ccccccceees 3

Banaitis v. Commissioner, 340 F.3d 1074

ae aenterncienniiniccieciniaiericinnibinieaiateaasittin abaisiaa 2

Banks v. Commissioner, 345 F.3d 373

SN SI crecietensnanicnnahinsiateenttestiemmattacsietinteiill 2,6, 7,9

Bartholomew v. Commissioner,

pe Be Oe 11

City of Riverside v. Rivera, 477 U.S. 561 (1986)................. 10

Estate of Clarks v. United States, 202 F.3d 854

SS ee eee 9

Commissioner v. Culbertson, 337 U.S. 733 (1949) ............. 11

Commissioner v. First Sec. Bank, 405 U.S. 394

Se ccceieninicinnteniasnicepunsiaihienaiepitaialaciaaiiaitaia Alacaciaa iat 5,6

Commissioner v. Glenshaw Glass Co., 348 U.S. 426

Sree cnneneiantntenenennstninienishinsinadeientintaielastndimitaataaiaanD 4,5

Commissioner v. Schleier, 515 U.S. 323 (1995) ........cccccc0e00e 5

Deposit Guar. Nat'l Bank v. Roper,

SO SI cinerea aici ial 10

Ferry Market, Inc. v. Commissioner, 5 B.T.A. 167

SE PEETETE crnaconenccnncieresntasisinainianinaeaiaesiteaidindiaindiaceessiietuaadintiaiaiieaislaal 11

Page

CASES — CONTINUED:

Gregory v. Helvering, 293 U.S. 465 (1935).........cceeseseeeeees 7

Hanover Bank v. Commissioner, 369 U.S. 672 (1962).......... 9

Helvering v. Clifford, 309 U.S. 331 (1940).........cccccccceeeeeeees 6

Helvering v. Horst, 311 U.S. 112 (1940) ...........cccceeeee passim

Hillsboro Nat'l Bank v. Commissioner,

a: Se ee chintirinitmnesanauncnsinincinaiaie 1]

Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd,

259 F.3d 881 (7th Cir. 2001)...............eeeeeeeee 3, 12, 13

Kenseth v. Commissioner, 259 F.3d 881

oe 5 9

Lucas v. Earl, 281 U.S. 111 (1930) ...........ccecseesseseeees passim

Old Colony Trust Co. v. Commissioner, 279 U.S. 716

a Oe 6

Pearsall v. United States, 52 F.2d 1050

i Ges CER ccceemesnnciennntenainnnctntincinvinianrntamemunanions 11

Podell v. Commissioner, 55 T.C. 429 (1970)............ccecceeee0 ll

Raymond v. United States, 355 F.3d 107 (2d Cir.

a cnecncovennenscmpencinntiteninagiagiieamaadieesiibisaniaiieidiniimiiiiadiaias 3

Rowan Cos. v. United States, 452 U.S. 247 (1981)............... 9

United States v. Basye, 410 U.S. 441 (1973) -.vccccsccsssseeeeeee ll

iv

Page

STATUTES AND REGULATIONS:

Me TED © cexessicssiantniiveinisienittsianiiasiiniaiianliaiiiainnwianbiiniiads 2,7

26 USC.§ DS wnnucsniiitiimniessinannniaiiattiiiiiiniestniiiniaiaieipiaiai 1,4

Pipe Ut ai iniccnerssinsncnisionnetenentncinasaniiioliiasaiiteitsintinidiniiiniatnisianiial 4

es I crscirrestiiniiicteniniaasvnneacitdanssiitaiaiiaiuaitiiimiasiiiniia 5

Pes Ae eisiiitericienicccratitieiicitniitiaisitiiigailinsaiitastia ial 4

ir Oe eniernhicnscnsitinsincnniannctinniiccinicanicainaininiineaniatiiaamsiiticasniai’ 4

Sr ies: OF ee nicssiecccviesciemnnsininingnsnpenainiindinetiniiasinniiamimiaiiass l

eae Uy ie noicsnecineiinantatiniiasieicsieniianiieisiliaieiaieiianiinaia imac l

SP tees COIS ‘cisersiciarsincinsictsntninsipeniiniiouiitiibibcinibinbimiepiiaiaiieemial 8

ees Oe Tae niscictineasiccniresiebihibcisneinanniaiteiaaieaianiiitiaaatiiaaiaaas 7

eae EE icricicrierisirennestientaesiinsiananaiibaptiiaminbieniniteaneel 8

ln 0 I nisinetinncsinnicnnetcinninnntnneninmmeieanenmatniaiiatal 4

pT REESE eS 8

OTHER AUTHORITIES:

Adam Liptak, Tax Bill Exceeds Award to Officer in

Sex Bias Suit, N.Y. Times, Aug. 11, 2002, at

| __ E TT AE 2

Private Letter Ruling 200427009 (July 2, 2004) ................... 8

eee

|

INTEREST OF AMICI CURIAE

Kenneth W. Gideon, Maxine Aaronson, Gail

Richmond, and Mona L. Hymel are tax attorneys who have

advised clients, made continuing legal education and bar

presentations, or written on the tax treatment of contingent

attorney's fees over many years. Gail Richmond and Mona

L. Hymel are tax professors.’

SUMMARY OF ARGUMENT

Under the position espoused by the United States in

the two cases before the Court, a recovery of nominal

damages (say $1) together with an award of substantial

attorney's fees (say $275,000) by an unmarried plaintiff who

successfully vindicates an important nght justifying the

award of such fees will result in that plaintiff receiving a tax

bill from the Internal Revenue Service for not less than

$73,500, despite the fact that the only amount received by

the plaintiff was a single dollar.? The plaintiff's attorneys

' Pursuant to this Court's Rule 37.3(a), letters of consent from all

parties to the filing of this brief have been filed with the Clerk. Pursuant

to this Court's Rule 37.6, amici state that this brief was not authored in

whole or in part by counsel for any party. No person other than the amici

has made a monetary contribution to the preparation or submission of

this brief.

> Although attorney's fees are deductible for regular income tax

purposes under either 26 U.S.C. § 162 (ordinary and necessary business

expenses) or § 212 (expenses for the production of income), neither

employee business expenses nor § 212 deductions are allowed for

purposes of the alternative minimum tax imposed by 26 U.S.C. § 55. On

the facts stated above, if fees received by the plaintiff's attorney are also

included in the plaintiff's income (as the Government contends), the tax

imposed would be at least $73,500 ($275,001 gross income x 26% tax

rate on the first $175,000 and 28% on any additional amount per §

55(b 1M A)iMD). If attorney's fees of the magnitude set forth in the

are included in the plaintiff's income, any exemption provided

by § 55(d)(1)(B) would be fully phased out. 26 U.S.C. § 55(d\(3)B).

2

will receive (and also be taxed) on the $275,000 in awarded

fees. Imposing a tax bill of $73,500 on a single dollar of

disposable income cannot be defended on policy grounds,

nor can it plausibly be contended that so anomalous a result

was "intended" by Congress.

The possibility that a successful plaintiff would owe

the Government more in taxes than the plaintiff recovers is

not a mere hypothetical possibility unc«r the Government's

position.’ The actual facts of the Baxaitis case illustrate the

anomaly of the Government's position as well. Although the

maximum individual income tax rate enacted by Congress in

26 U.S.C. § 1 is currently 35 percent, the effective rates of

tax on the amounts actually paid to Mr. Banaitis and Mr.

Banks are well in excess of the 35 percent rate. Banaitis v.

Commissioner, 340 F.3d 1074, 1078 (9th Cir. 2003); Banks

v. Commissioner, 345 F.3d 373, 376-77 (6th Cir. 2003).

This result, the Government argues, is compelled by

the Internal Revenue Code and the assignment of income

doctrine set forth in this Court's decisions in Lucas v. Earl,

281 U.S. 111 (1930) ("Earl") and Helvering v. Horst, 311

U.S. 112 (1940) ("Horst"). Neither case requires the result

the Government seeks. No Code provision demonstrates any

intention by Congress to tax litigants as the Government

contends.

The assignment of income doctrine is an anti-abuse

rule devised by this Court to prevent inappropriate income

shifting among family members or other related persons. In

> See Adam Liptak, Tax Bill Exceeds Award to Officer in Sex

Bias Suit, N.Y. Tumes, Aug. 11, 2002, at Al2, reporting the case of a

Chicago police officer who recovered an award for sex discrimination

and harassment of $300,000 and attorney's fees of more than $1,000,000

with the result that her tax bill consumed her entire $300,000 award and

left her owing the Internal Revenue Service more than $99,000 in taxes.

3

contrast to Earl and Horst, there is no taxpayer "abuse" in

the cases at bar. They involve the mos: common form of

funding of individual tort litigation — contingent fees — not an

artificial shifting of income designed to defeat the income

tax laws. These cases represent an effort by the

Government to impose an irrationally high and highly

variable level of tax burden on successful plaintiffs. The

exact rate depends on the fees payable to a plaintiff's

attorney rather than the amount received by or under the

dominion and control of the taxpayer. There is no

Congressional mandate to tax the same income to plaintiffs

as well as to their attorneys.

The assignment of income doctrine emerging from

Earl and Horst is the judiciary's creation, not an enactment

of Congress. It is not a constitutional principle or immutable

“super law." In the court decisions that have adopted the

Government's position that the assignment of income

doctrine should be extended to reach contingent fees, the

authors of the decisions have described the result as one that

"smacks of injustice," is "unfortunate" and has a "potential

for unfairness." See, e.g., Alexander v. IRS, 72 F.3d 938, 946

(1st Cir. 1995); Raymond v. United States, 355 F.3d 107, 115

(2d Cir. 2004); Kenseth v. Commissioner, 114 T.C. 399, 407

(2000), aff'd, 259 F.3d 881 (7th Cir. 2001). It is the duty of

this Court, as the author of the assignment of income

doctrine, to correct that doctrine's erroneous application to

these circumstances.

* The plaintiffs and the attorneys in the two cases before the

Court are not related. Nor is there any suggestion that the contingent fees

paid in either case are anything other than arm's length transactions. In

contrast, both Ear/ and Horst involved intrafamily gifts.

4

ARGUMENT

I. THE INTERNAL REVENUE CODE CONTAINS

NO PROVISION REQUIRING THAT A

CONTINGENT FEE PAID TO THE ATTORNEY

FOR A SUCCESSFUL PLAINTIFF BE TAXABLE

TO BOTH THE PLAINTIFF AND _ THE

ATTORNEY

The question in this case depends upon whether a

plaintiff is taxable on an amount paid to the plaintiff's

attorney under either a contingent fee contract (providing

that a percentage of any recovery will be payable to the

plaintiff's attorney) or under a statutory provision authorizing

recovery of attorney's fees as well as damages.’ In its brief,

the Government identifies no provision of the Code that

requires that such fees be taxed as if they were first income

to the plaintiff and then taxed again to the attorney, and there

is none.°

Instead, the Government relies on cases such as

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)

(holding that antitrust treble damages were taxable) and

* See, e.g., 42 U.S.C. § 2000e-5(k) (providing for attorney's fees

under the Civil Rights Act of 1964).

® Congress has limited the deductibility of attorney's fees

incurred as employee business expenses (i.e., fees incurred without

granting the attorney any share in any ultimate recovery) for purposes of

the regular tax, 26 U.S.C. §§ 62(a)(2) and 67, and denied the deduction

altogether for purposes of the alternative minimum tax, 26 U.S.C. §§ 55-

56. Those situations differ from the contingent fee arrangements in

which the plaintiff cannot exercise dominion and control over the amount

received by the attorney. The statutory language imposing deduction

limitations on employee business expenses discloses no Congressional

intention to tax plaintiffs on fees paid to their attorneys under contingent

fee arrangements.

5

Commissioner v. Schleier, 515 U.S. 323 (1995) (holding that

age discrimination recoveries were not compensation for

personal injuries) for the proposition that 26 U.S.C. § 61(a)

exercises "the full measure of [Congress'] taxing power" and

taxes “all gains except those specifically exempted."

(Petitioner's Brief at 15.)

The question is not whether the attorney's fee is gross

income; the question is whose gross income is it? Attorney's

fees (from the perspective of a plaintiff as opposed to an

attorney) do not meet the Glenshaw Glass standard of

"undeniable accessions to wealth, clearly realized, and over

which the taxpayers have complete dominion." 348 U.S. at

431. Regardless of the vagaries of state attorney's lien laws,’

all such laws provide that once a properly executed

contingent fee contract is in place (and the attorney performs

the services required under the contract), the attorney, not the

litigant, enjoys the wealth embodied in the fee, realizes that

amount, and has complete dominion over it. As this Court

observed long after the decisions in Ear/ and Horst,

We know of no decision of this Court

wherein a person has been found to have

taxable income that he did not receive and

that he was prohibited from receiving... .

The underlying assumption always has been

” While the Government errs in attempting to attribute fees

earned by and belonging to the attorney in a contingent fee case to the

plaintiff, it is correct that the consequences of such contingency fee

arrangements should not depend on subtle variations in state lien law.

Under all the states’ attorney lien laws, the plaintiff cannot exercise

dominion or control over the portion of any recovery payable to the

plaintiff's attorney under a contingent fee contract absent the attorney's

malfeasance or failure to perform. It is this core reality that should

govern the Federal tax consequences of contingent fee and statutory

attorney's fee cases, not the variations in each state's law.

6

that in order to be taxed for income, a

taxpayer must have complete dominion over

it.

Commissioner v. First Sec. Bank, 405 U.S. 394, 403 (1972).°

II. THE ASSIGNMENT OF INCOME DOCTRINE

DOES NOT REQUIRE THAT A PLAINTIFF BE

TAXED ON INCOME HE DID NOT EARN AND

CAN NEVER RECEIVE OR CONTROL

Earl dealt with an individual's effort to assign one-

half of his salary to his wife for reasons unrelated to the

income tax. (Indeed, the assignment in 1901 was made long

before the income tax was enacted.) As the Earl Court

noted, performance of the services giving rise to the

taxpayer's salary could not "be taken by anyone but himself

alone." 281 U.S. at 114. By contrast, litigants engage

attorneys precisely because they themselves lack the ability

to successfully pursue their claim without the assistance of a

person trained in the law and skilled in legal matters. As the

Sixth Circuit recognized in Banks, 345 F.3d at 384, the

* The Government cites Helvering v. Clifford, 309 U.S. 331, 338

(1940), but that case did not reach the assignment of income doctrine.

The Court found the settlor's dominion over the income and corpus in a

family trust situation was so little disturbed by the purported assignment

to other family members that it was ineffective for income tax purposes.

In Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729-31 (1929),

also cited by the Government, this Court held that an employer's payment

of the income tax on an employee's salary constituted additional <axable

income to the employee. Unlike this case, there was no issue there as to

whether the income on which the tax payment was predicated was

properly taxable to the employee; it was the employee's salary which

could not be attributed to the efforts of any other person. Old Colony

Trust thus does not reach the question of whether contingent fees or

statutory attorney's fees are includible in a plaintiff's income and does not

provide a precedent for such inclusion.

7

taxpayers were "dependent upon the attorney's skills to

realize any value from [their claims]." Horst involved a gift

of bond coupons for periodic interest payments by a father to

a son while the father retained the bond itself (and the nght

to principal repayment the bond itself represented).” Horst

recognized that its conclusion (that the interest income

remained taxable to the father) was dependent upon the

conclusion that the father was the person "who earn[ed] or

otherwise create[d] the right to receive it and enjoy the

benefit of it when paid.” 311 U.S. at 119.

Had either of the taxpayers in Earl or Horst

succeeded in transferring the tax on income earned by the

donor to relatives in lower tax brackets, the progressive

income tax rate structure as enacted by Congress would have

been circumvented. As in another of this Court's landmark

anti-abuse decisions of the same era, Gregory v. Helvering,

293 U.S. 465, 469 (1935), the assignments attempted in Ear/

and Horst did not comport with Congressional intent.

Consistency with the reasoning of Gregory, however,

requires that the Government likewise be forbidden to

achieve unintended and unjust results based on essentially

technical arguments.

While it is undoubtedly true that "income is taxed to

the person who earned it" (Petitioner's Brief at 14), the

Government errs in asserting that Mr. Banks and Mr.

* Both Earl and Horst have been displaced on their specific facts

by subsequent statutory provisions crafted by Congress to address the

issues in those cases. Thus, Congress has provided a different rate

schedule for married taxpayers filing joint returns in 26 U.S.C. § l(a) to

address (at least to some degree) the difference in taxation between

taxation of income earned by married taxpayers in separate property and

community property states. The income taxation of stripped bond

coupons at issue in Horst is now governed by 26 U.S.C. § 1286 and

would now differ substantially from the result reached in Horst.

8

Banaitis "would have been required to include the entire

taxable proceeds from those courses of action in their gross

income if the proceeds had been paid directly to them.”

(Petitioner's Bnef at 16; see also id. at 24.) Tax

consequences do not turn on the formalities of how funds are

transferred, but on the economic nghts of the parties in those

funds and the substance of the transactions. For example,

under 26 U.S.C. § 482 and the regulations thereunder dealing

with related party transactions, taxable income is allocable to

‘the taxpayer who bears the nisks, exercises functional

control, and has the contractual responsibility and duty to

perform services, not the one who received a payment in the

first instance. Treas. Reg. § 1.482-1(d)(1).

Prior to the filing of any lawsuit, the plaintiffs here,

by executing contingent fee contracts, separated themselves

from any dominion or control over the amounts that would

ultimately become payable to their attorneys in the event of a

recovery. At the time those contracts were entered into,

there was no certainty that the plaintiffs would recover any

amount, and the amounts recovered were clearly dependent

upon the skill and efforts of their attorneys.'® Unlike the

'° In Private Letter Ruling 200427009 (July 2, 2004), the

Internal Revenue Service held that a plaintiff's partial allocation of a

claim against an insurer to a third party (in consideration for the third

party's forgoing certain claims against the plaintiff) did not constitute an

assignment of income. In the ruling, the Internal Revenue Service stated

that "in general, a transferor who makes an effective transfer of a claim in

litigation to a third person prior to the time of the expiration of appeals in

the case is not required to include the proceeds of the judgment in income

under the assignment of income doctrine because such claims are

contingent and doubtful in nature." The ruling held specifically that the

assignment of income doctrine did not apply. By application of similar

analysis in this case, an allocation of a portion of a claim to an attorney

as a contingent fee would result in the fee being gross income only to the

attorney. No portion would be income to the plaintiff. Under 26 U.S.C.

§ 6110(k)(3), such rulings may not be relied on as precedent; however,

this Court has cited such rulings where the analysis in the ruling was

9

salary in Earl or the bond coupon in Horst, there was no

certainty that any amount could be collected. The active

involvement and effort of plaintiffs’ attorneys were required

to bring the recoveries about. The plaintiffs here could not

generate their recoveries by their efforts or capital alone.

Referring to a contingency fee arrangement, the Sixth

Circuit in Estate of Clarks v. United States, 202 F.3d 854,

857-58 (6th Cir. 2000) stated, "(t]he present transaction .. .

is more like a division of property than an assignment of

income" because "the value of taxpayer's lawsuit was

entirely speculative and dependent on the services of

counsel." The Sixth Circuit recognized this fact in Banks,

stating that "a contingency fee, as part of a litigation claim,

was not already earned, vested, or even relatively certain to

be paid to the assignor, but instead was merely ‘an intangible,

contingent expectancy,’ dependent upon the attorney's skills

to realize any value from it." 345 F.3d at 384 (citation

omitted).

In support of its argument that attorney's fees under a

contingent fee contract or statutory award are taxable to both

the plaintiff and the attorney who earned them, the

Government, citing the Seventh Circuit's decision in Kenseth

v. Commissioner, 259 F.3d 881, 883 (7th Cir. 2001),

contends that failure to attribute the amount payable as a

contingent attorney's fee to the plaintiff would unfairly

distinguish contingent fees from attorney's fees determined

on an hourly basis. (Petitioner's Brief at 24; see also id. at

31.) But the hourly-fee-paying plaintiff gives up nothing

with respect to any part of any judgment or settlement

ultimately received. Such a plaintiff may dismiss one

pertinent to the issue before the Court. See, e.g., Rowan Cos. v. United

States, 452 U.S. 247, 261 n.17 (1981); Hanover Bank v. Commissioner,

369 U.S. 672, 686-87 (1962).

10

attorney at will and hire another because the attorney has no

right of any kind in the recovery and does not share the risk

of loss or the reward of success. Indeed, at some later point

in the litigation, such a plaintiff may choose to enter into a

contingent fee contract if the payment of hourly fees proves

too onerous. In contrast, a plaintiff who has entered into a

contingent fee arrangement cannot divest a performing

attorney of the attorney's right to a specified portion of the

ultimate award and has restricted abilities to terminate the

attorney.

The argument that parity between contingent fee

payors and hourly fee payors is desirable as a "neutral

principle" cannot justify the draconian results of the

Government's position. Indeed, the Government's position

will prevent some plaintiffs from vindicating important legal

rights for fear that any monetary award will be insufficient to

cover the tax assessed on the plaintiff for the contingent fee

paid to the attorney.’

Admittedly, the client in a _ contingent fee

arrangement typically retains two rights: the nght to dismiss

the lawsuit (and thus preclude any recovery) and the nght to

approve any settlement (i.e., the attorney cannot settle the

plaintiffs lawsuit without the plaintiff's consent). But

neither of these rights differs from the rights a co-venturer or

co-owner may exercise without being treated as "earning"

the share of income accruing to the other venturer or owner.

' See, e.g., City of Riverside v. Rivera, 477 U.S. 561, 577-78

(1986) (recognizing that "'[F]ee awards have proved an essential remedy

if private citizens are to have a meaningful opportunity to vindicate the

important Congressional policies which these laws contain.” (citation

omitted)); Deposit Guar. Nat'l Bank v. Roper, 445 U.S. 326, 338 (1980)

(recognizing the important role contingent fee arrangements have "played

in vindicating the rights of individuals who otherwise might not consider

it worth the candle to embark on litigation . . . .").

ll

These legal relationships have long been recognized by the

Government as being outside the assignment of income

doctrine. '?

As Earl and Horst demonstrate, this Court adopted

the assignment of income doctrine in the intrafamily context

and has applied it in the context of assignments and transfers

between related parties. See, e.g., Commissioner v.

Culbertson, 337 U.S. 733 (1949) (applying doctrine in the

context of intrafamily assignment); United States v. Basye,

410 U.S. 441 (1973) (applying doctrine in the context of

assignments among a partnership and its partners); Hillsboro

Nat'l Bank v. Commissioner, 460 U.S. 370 (1983) (applying

doctrine in the context of assignments between a corporation

and its shareholders). The extension of such a judge-made

doctrine beyond the related party context in which it

developed is simply not warranted in these cases and the

result of such extension "smacks of injustice.” '°

? It is well settled that co-owners are taxable only on their

proportionate shares of the income received. See Pearsall v. United

States, 52 F.2d 1050 (Ct. Cl. 1931) (undivided interest in exclusive sales

agency for specialized iron products); Ferry Market, Inc. v.

Commissioner, 5 B.T.A. 167 (1926) (fractional interest in steam

schooner). In real estate ventures and crop share farming, all parties

benefit from shared efforts in the same sense that a plaintiff benefits from

an attorney's efforts, yet those co-venturers report only their own income

share. They are not taxed on another party's income and then forced to

deduct the third party's share as an expense for the production of income.

See Bartholomew v. Commissioner, 10 T.C.M. (CCH) 957 (1951)

(engineer who contributed services was joint venturer with investors in

real estate project); Podell v. Commissioner, 55 T.C. 429 (1970)

(attorney providing capital is joint venturer with real estate operator

providing services).

'’ The Tax Court majority in Kenseth premised its adoption of

the Government's position here on its perception of “dangers in the ad

hoc modification of established tax law principles or doctrines [i.e., the

assignment of income doctrine} to counteract hardship in specific cases."

12

CONCLUSION

The Tax Court dissenters in Kenseth v. Commissioner

had it night when they protested that:

The [Tax Court] majority in the

instant case tax to petitioners substantial

funds that petitioners did not receive, were

never entitled to receive, and never turned

their backs on. They do so in the name of the

assignment of income doctrine. The majority

acknowledge that there may be injustice in so

doing, and that the injustice may well be even

greater in other real-life settings than in the

instant case. They contend that precedents

compel them to this result and that relief can

come only from the hills (Psalm 121), or at

least from Capitol Hill. But this Court has

shown . . . that reexamination of the origins of

the assignment of income doctrine can

sharpen our understanding of the concepts

and make more rational the application of that

doctrine. We do not lightly overrule our prior

decisions. But when experience and analysis

show that we have departed from the origins

that we once thought to be the foundations of

Kenseth, 114 T.C. at 407. However, neither the Government in its brief

nor any of the courts that have adopted the Government's position have

articulated what those “dangers” might be. Indeed, respecting unrelated

parties’ allocation of income in a contingent fee context just as they are

respected in partnerships, sharecropping situations and other co-venturer

arrangements poses no such “danger.” Thus, ruling that the assignment

of income doctrine does not apply here is not an "ad hoc modification of

established tax law principles,” but rather an opportunity for this Court to

prevent an unjust and erroneous expansion of the assignment of income

doctrine and to clarify that the doctrine is not applicable in the contingent

fee context where there are no related parties.

13

those decisions, and when it is our judicial

interpretations and not the statute law that

lead to results that increasingly seem to be

unjust, then we ought to reexamine the

foundations of the doctrine.

114 T.C. at 420-21 (citations omitted).

This Court should not permit the assignment of

income doctrine, a judicially crafted anti-abuse rule, to

become itself a source of abuse and injustice. Indeed, a

refocusing on the basis for the assignment of income

doctrine would be completely consistent with Justice

Holmes’ admonition in Ear/ that the decision should turn "on

the import and reasonable construction of the taxing act,"

281 U.S. at 114, and with Justice Stone's pronouncement in

Horst that "[c]ommon understanding and experience are the

touchstones for the interpretation of the revenue laws,” 311

U.S. at 118. Taxing plaintiffs on income they can never

receive or control and which their attorneys, not they, have

earned, defies both "common understanding and experience"

and is not a “reasonable construction” of the Internal

Revenue Code.

This Court should affirm both judgments and hold

that the taxpayers are not taxable on contingent fees that

14

were paid to their attorneys and over which they had no

dominion or control.

Respectfully submitted,

KENNETH W. GIDEON* MAXINE AARONSON

SKADDEN, ARPS, SLATE, 3131 McKinney Ave.

MEAGHER & FLOM LLP Suite 420

1440 New York Ave., N.W. Dallas, TX 75204

Washington, D.C. 20005 (213) 220-2050

(202) 371-7540

*Counsel of Record for Amici

GAIL RICHMOND MONA L. HYMEL

NOVA SOUTHEASTERN UNIVERSITY OF ARIZONA,

UNIVERSITY, SHEPARD JAMES E. ROGERS

BROAD Law CENTER COLLEGE OF LAW

3305 College Ave. P.O. Box 210176

Fort Lauderdale, FL 33314 Tucson, AZ 85721

(954) 262-6102 (520) 621-3838

AUGUST 2004