Amicus Curiae Brief — Commissioner of Internal Revenue v. Banks

a

Nos. 03-892 and 03-907 Aue 17 2004

In The

Supreme Court of the Gnited States

°

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

V.

JOHN W. BANKS, II,

Respondent.

+

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

V.

SIGITAS J. BANAITIS,

Respondent.

e

On Writs Of Certiorari To The United States Courts

Of Appeals For The Sixth And Ninth Circuits

S

AMICI CURIAE BRIEF OF MOUNTAIN STATES

LEGAL FOUNDATION, SOUTHEASTERN LEGAL

FOUNDATION, DEFENDERS OF PROPERTY

RIGHTS, AMERICAN CENTER FOR LAW

AND JUSTICE, LIBERTY LEGAL INSTITUTE,

OREGONIANS IN ACTION LEGAL CENTER,

ALLIANCE DEFENSE FUND, NATIONAL

LEGAL FOUNDATION, ATLANTIC LEGAL

FOUNDATION, TEXAS JUSTICE FOUNDATION,

NEW ENGLAND LEGAL FOUNDATION, AND

LANDMARK LEGAL FOUNDATION

IN SUPPORT OF RESPONDENTS

e

WILLIAM PERRY PENDLEY*

*Counsel of Record

J. ScoTT DETAMORE

MOUNTAIN STATES LEGAL FOUNDATION

2596 South Lewis Way

Lakewood, Colorade 80227

(303) 292-2021

Attorneys for Amici Curiae

COCKLE LAW BRIEF PRINTING CO (800) 225 0964

ORK CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Whether, under Section 61(a) of the Internal Revenue

Code, 26 U.S.C. § 61(a), a taxpayer’s gross income from the

proceeds of litigation includes the portion of his damages

recovery that is paid to his attorneys pursuant to a contin-

gent fee agreement.

ii

TABLE OF CONTENTS

QUESTION PRESENTED...............ccccccsscsssssssseeseeeeeees i

AMICI CURIAE BRIEF OF MOUNTAIN STATES LEGAL

FOUNDATION, SOUTHEASTERN LEGAL FOUNDA-

TION, DEFENDERS OF PROPERTY RIGHTS,

AMERICAN CENTER FOR LAW AND JUSTICE,

LIBERTY LEGAL INSTITUTE, OREGONIANS IN

ACTION LEGAL CENTER, ALLIANCE DEFENSE

FUND, NATIONAL LEGAL FOUNDATION, ATLAN-

TIC LEGAL FOUNDATION, TEXAS JUSTICE FOUN-

DATION, NEW ENGLAND LEGAL FOUNDATION,

AND LANDMARK LEGAL FOUNDATION ...............++ 1

INTEREST OF THE AMICI CURIAE..............::00c00000000+ 1

STATEMENT OF THE CASE.............:ccccsssssssseeesseereneees 6

SUMMARY OF THE ARGUMENT. .............cccccsesseeeeeees 6

ARGUBEEINT. .....cccccccoccccossessossscosouinesesonsensensnnnnnsninnnnnnnn 6

I. THE OPINIONS OF THE SIXTH AND NINTH

CIRCUITS SHOULD BE AFFIRMED ................. 6

II. PILFs’ “REPRESENTATION” AGREEMENTS

ARE NOT “CONTINGENT FEE” AGREE-

A. REPRESENTATION AGREEMENTS BE-

TWEEN PILFs AND THEIR CLIENTS DO

NOT CONSTITUTE AN ANTICIPATORY

ASSIGNMENT OF INCOME BY THEIR

CLIENTS TO PILFS ...............scssssessessssesessenees 9

1) PILFs’ attorneys’ fees cannot constitute

an assignment of income because the

fees are recovered from third parties,

not from any taxable damage award to

COE GEIGER .ccccccscccssccresessennennenenennins 9

TABLE OF CONTENTS - Continued

Page

2) Attorneys’ fees recovered by PILFs

under federal fee-shifting statutes are

earned by the PILF, not by the client,

and therefore do not involve an

assignment of the client’s income ......... 10

B. THE RECOVERY OF ATTORNEYS’ FEES

BY PILFs PURSUANT TO FEDERAL

FEE-SHIFTING STATUTES DOES NOT

CONSTITUTE THE DISCHARGE OF AN

INDEBTEDNESS ............ccccscccesseseeseeeeeeeees 14

Ill. PUBLIC POLICY DICTATES THAT ANY

ATTORNEYS’ FEES RECOVERED BY PILFs

PURSUANT TO FEDERAL FEE-SHIFTING

STATUTES NOT BE INCLUDED IN THE

GROSS INCOME OF THEIR CLIENTS .......... 17

IY crecencecscsereceseczssescsesesssonessccsosscceccsesoccseccees 20

iv

TABLE OF AUTHORITIES

Page

CASES

Baylin v. United States, 43 F.3d 1451 (Fed. Cir.

ere aa iere Meese AEA Nh eee eae i]

Blum v. Stenson, 465 U.S. 886 (1984)...............cccccceeeeeeeeeees 3

City of Burlington v. Dague, 505 U.S. 557 (1992)............. 16

Commun’r v. Culbertson, 337 U.S. 733 (1949).............. 11, 14

Cornella v. Schweiker, 728 F.2d 978 (8th Cir. 1984)........... 4

Corrigan v. United States, 27 F.3d 436 (9th Cir.

eer eran enveneee eee rr NTT TF eee 11

Ed. A. Wilson, Inc. v. General Services Administra-

tion, 126 F.3d 1406 (Fed. Cir. 1997) ..............cccccceeeeeeeeeeee 4

Evans v. Jeff D., 475 U.S. 717 (1986)...........:cccccccseeeeeeneeees 12

Gisbrecht v. Barnhart, 535 U.S. 789 (2002)....................+. 16

Helvering v. Horst, 311 U.S. 112 (1940) ...........cccccceeeees 8, 10

Hukkanen-Campbell v. Commn’r, 274 F.3d 1312,

(10th Cir. 2001), cert. denied, 535 U.S. 1056

SE CR er eerer meron INOS Rnee INN i]

Hunt v. Washington Apple Adver. Comm'n, 432 U.S.

Reece as eee 14

Kenseth v. Commn’r, 259 F.3d 881 (7th Cir. 2001) ............. 9

Krecioch v. United States, 316 F.3d 684 (7th Cir.

TTT xiansiecintcsassteasiaiesiunansnashiatiieiaaiaantsiaiiataeiiatineslatieeiahdaa aida 11

Lucas v. Earl, 281 U.S. 111 (1930).......................... 8, 10, 11

Missouri v. Jenkins, 491 U.S. 274 (1989).................cccecceeee 5

Naekel v. Dep't of Transportation, 845 F.2d 976

GE, Cee cccccnnvensasesenenssssnssnenminsassienmmmmnmmeinaneien 11

v

TABLE OF AUTHORITIES -— Continued

Page

New York Gaslight Club, Inc. v. Carey, 447 U.S. 54

ree eicaseinnaliatibieicahichdentiasianesccernsastiaicaia tiated atemmaiiiniiaa 3

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

eS ee a 14

Phillips v. General Services Admin., 924 F.3d 1577

EE ee SE ee 13

Porter v. U.S. Agency for Int'l Dev., 293 F.Supp.2d

RE eve 19

Preseault v. United States, 52 Fed. Cl. 667 (Fed. Cl.

erie cansiicrachcietiecncaitiiaiiaiummantaia imitans 4

Raney v. Federal Bureau of Prisons, 222 F.3d 927

re Oe noe ES 19

Sinyard v. Commn’r, 286 F.3d 756 (9th Cir. 2001),

cert. denied, 536 U.S. 904 (2002)................ Siealibediataisiiainenli 15

Smith v. DeBartoli, 769 F.2d 451 (7th Cir. 1985) ............. ll

Young v. Commn’r, 240 F.3d 369 (4th Cir. 2001) ................ i]

STATUTES

es I ies caisninchincatiniiieibiiaitiiliiciaani diiiilcinial 1l

ee Ce icrtitinnitninniesincinsiniedinaicamniiitiammtiatitaitasiiisies 17

re Le ET eT 8

ed Ce I inccrcetihinsistnintineenbinaiiaitiiteaibiiabinitincicaitetas 8,14

i atin lanria tik cinienciictictnecieniecinieiiniatiatartieeeematinrieaiel 12, 22

ee crrsccrnceineenidiineitinnetiiinsieniniaiabieiiitieliidl 2, 3,4

Se ciinicttinsiintiinsnsictiniaatnmatiniiaiddhatiaiatdeel a meiiaits 11

aD Ces © Si ecnnscscescsnnscenennscenecsrenimnntneninennstinenisnaaininiit 17

vi

TABLE OF AUTHORITIES -— Continued

Page

ee Oe ee certcccnncetnccestenicnititniciitiieitibeditpiataia 3,11, 12

ls SP ecncnnecstronnisusnianntesnennpaieeaianeiii 12, 15

Ce Ie nnrcsicnstntcennnneninainsiaietpnautinmessssinesinaaties 17

ter I iicniinennnsererinnnttncbenetnemenenmaienntineiates 17

ee ee cccnccccnnciliibiitsitaniciinidinintineatianiitemninnninipiiss 17

REGULATIONS

BE 3

CourRT RULES

Supreme Court Rule 37(3)(a).................ssssecccccsseceesseceeeceeees 1

ee ccicctintinieniesiitiinniinttananaiaitiiniapiaainsiias 1

LEGISLATIVE HISTORY

S.Rep. No. 94-1011, reprinted in, 1976 U.S.C.C.A.N.

ITED uisceenccteniednccsinenieiacnpannnsithinntiniiliatpeciiaiimmnciniaastaaiemimaaiasil 5,17

JOURNAL AND LAW REVIEW ARTICLES

Daly, In-Person Solicitation by Public Interest Law

Firms; A Look at the ABA Code Provisions in

Light of Primus and Ohralik, 49 Geo Wash. L.

ee Ge Ee Ue cctisscnencsseninianinanbamnnsiniapinniinesiienesnnes 3

Dunne, Attorney's Fees For Citizen Enforcement of

Environmental Statutes: The Obstacles for Public

Interest Law Firms, 9 Stan Envtl. L.J. 1 (1990)........... 18

Vii

TABLE OF AUTHORITIES - Continued

Page

Ginsburg, Jn Pursuit of the Public Good: Access to

Justice in the United States, 7 Wash. U. J.L. &

tin IE catnsnecnsnsnnitsnbeieinnenigmecsmiasiiiameibeiiatena 3

Sager and Cohen, How the Income Tax Undermines

Civil Rights Law, 73 S. Cal. L. Rev. 1075 (2000)............ 5

OTHER AUTHORITIES

Colorado Rules of Professional Conduct 6.1..................... 19

NN a arena dail italic cael 3, 4, 12

ESP ae Roce ee vee nee ar 12

ee ee eR ONE rnd ee 13

A cS Lie ne Wes 13, 14, 19

1

AMICI CURIAE BRIEF OF MOUNTAIN STATES

LEGAL FOUNDATION, SOUTHEASTERN LEGAL

FOUNDATION, DEFENDERS OF PROPERTY

. RIGHTS, AMERICAN CENTER FOR LAW AND

JUSTICE, LIBERTY LEGAL INSTITUTE, OREGO-

NIANS IN ACTION LEGAL CENTER, ALLIANCE

DEFENSE FUND, NATIONAL LEGAL FOUNDATION,

ATLANTIC LEGAL FOUNDATION, TEXAS JUSTICE

FOUNDATION, NEW ENGLAND LEGAL FOUNDA-

TION, AND LANDMARK LEGAL FOUNDATION

Mountain States Legal Foundation respectfully

submits this amici . uriae brief on behalf of itself, South-

eastern Legal Foundation, Defenders of Property Rights,

American Center for Law and Justice, Liberty Legal

Institute, Oregonians in Action Legal Center, Alliance

Defense Fund, National Legal Foundation, Atlantic Legal

Foundation, Texas Justice Foundation, New England Legal

Foundation, and Landmark Legal Foundation in support of

Respondents. Pursuant to Supreme Court, Rule 37(3)\a), this

brief is filed with the written consent of all the parties.’

+

INTEREST OF THE AMICI CURIAE

Whether attorneys’ fees recovered by Public Interest

Law Firms (PILFs) are taxable to their clients is of vital

concern to Mountain States Legal Foundation and the other

amici. If this Court rules in favor of the Commissioner with

* Copies of the consent letters have been filed with the Clerk of the

Court with this brief. In compliance with Supreme Court Rule 37(6),

amici curiae represent that no counsel for any party authored this brief

in whole or in part, and that no person or entity, other than amici

curiae, their members, or their counsel, made a monetary contribution

for the preparation or submission of this brief.

2

sufficiently expansive language, there is reason to believe

that the Commissioner will argue that attorneys’ fees paid

to PILFs are taxable to their clients. This would adversely

impact the ability of PILFs to undertake their vital role in

the judicial system: providing free legal services in mat-

ters of broad public interest to clients who could not

otherwise afford legal representation. While amici repre-

sented here may have different views with respect to

substantive issues of great public interest, they all agree

that taxation of their clients for the attorneys’ fees PILFs

recover pursuant to federal fee-shifting statutes would be

a blow to their mission of representing the public interest

as Congress intended.

Therefore, amici support the taxpayers in this case

and the decisions of the Sixth and Ninth Circuit Courts of

Appeals and urge this Court to affirm those decisions.

However, because Mountain States Legal Foundation and

the other amici, as PILFs, are unique in their legal status,

their “representation” agreements, and their relationship

with their clients, they wish to demonstrate to this Court

that their clients may not be taxed for the attorneys’ fees

received by PILFs that represent them and to inform this

Court of the devastating impact that an expansive ruling

for the Commissioner could have upon PILFs’ ability to

carry out their mission.

Mountain States Lega) Foundation, like each of the

other amici that have joined this brief, is organized and

operated exclusively for charitable purposes, with no part

of its net earnings inuring to the benefit of any private

shareholder, member, or individual. As such, the amici are

exempt from taxation as PILFs under § 501(c)(3) of the

Internal Revenue Code (26 U.S.C. § 501(c3)). Necessarily,

all the amici serve public rather than private interests in

3

their litigation. 26 C.F.R. § 1.501(3)(c)-1(d)(ii). Therefore,

while PILFs litigate on behalf of private litigants, they do

so only when the litigation can reasonably be said to serve

a broad public interest, rather than a private interest, as

provided by Rev. Proc. 92-59, which governs 501(c)(3)

qualified PILFs. Pursuant to Rev. Proc. 92-59, none of the

amici charge their clients lege) fees, but rather provide

legal services without charge to their clients.

In many cases, PILFs seek only declaratory and

injunctive relief; in many other cases, damage awards are

minimal. Because some of these cases take years to liti-

gate to conclusion, PILFs’ attorneys’ fees incurred on

behalf of their clients can be very substantial. PILFs earn

those fees by serving an important role in the judicial

system: protecting the public interest and providing legal

representation to those citizens who cannot afford to hire a

private attorney to defend or prosecute their interests in

matters of public importance. Ginsburg, In Pursuit of the

Public Good: Access to Justice in the United States, 7

Wash. U. J.L. & Pol’y 1, 8 (2001); see also, Daly, In-Person

Solicitation by Public Interest Law Firms; A Look at the

ABA Code Provisions in Light of Primus and Ohralik, 49

Geo. Wash. L. Rev. 309, 337 (1981) (arguing that PILFs

“bring the American legal systems one step closer to

attaining the goal of equal justice for all”).

Even though PILFs’ clients do not pay attorneys’ fees,

in light of the important role PILFs serve Congress in-

tended for PILFs to take advantage of various federal fee-

shifting statutes. See, Blum v. Stenson, 465 U.S. 886, 892-

896 (1984) (non-profit, legal aid society entitled to attor-

neys’ fees under 42 U.S.C. § 1988); New York Gaslight

Club, Inc. v. Carey, 447 U.S. 54, 70, n. 9 (1980) (PILF

entitled to attorneys’ fees under Title VII of the Civil

4

Rights Act of 1964); Cornella v. Schweiker, 728 F.2d 978,

985-87 (8th Cir. 1984) (pro bono legal service organization

entitled to attorneys’ fees under the Equal Access to

Justice Act); Ed. A. Wilson, Inc. v. General Services Ad-

ministration, 126 F.3d 1406, 1409 (Fed. Cir. 1997) (under

EAJA, an award of attorneys’ fees is not contingent upon

an obligation to pay counsel because the presence of an

attorney-client relationship suffices to entitle prevailing

litigants to receive fee awards if there is an express or

implied agreement that the fee award will be paid to the

legal representative); Preseault v. United States, 52 Fed.

Cl. 667, 673-677 (Fed. Cl. 2002) (PILF entitled to attor-

neys’ fees under the Uniform Relocation Assistance and

Real Property Acquisition Policies Act) (amici New Eng-

land Legal Foundation represented Preseault).

Likewise, the Commissioner, recognizing the important

role PILFs play in the judicial process, has determined that

PILFs are able to collect attorneys’ fees incurred on clients’

behalf pursuant to federal fee-shifting statutes without

jeopardizing their 501(cX3) status. For example, Rev. Proc.

92-59 allows PILFs to collect attorneys’ fees if those fees are

awarded by a court or administrative agency, or approved by

such a body in a settlement agreement, but only if: (1) the

likelihood or probability of a fee is not a consideration in the

selection of the case; (2) a case in which a court awarded fee

is possible is not accepted if the litigants have a sufficient

commercial or financial interest in the outcome of the

litigation to justify representation by a private law firm; and

(3) the total amount of all attorneys’ fees recovered by the

PILF does not exceed 50 percent of the PILF’s budget for

legal] functions, calculated over a five-year period.

Congress’ intent that PILFs receive attorneys’ fees

under federal fee-shifting statutes would be frustrated,

5

however, if clients of PILFs had to include those attorneys’

fees in their gross income. Take, for example, a plaintiff who

sues for a violation of her civil rights. Such a plaintiff gener-

ally cannot afford to pay an attorney on an hourly basis;

moreover, any potential damage award may not be large

enough to entice a private attorney to enter into a “contin-

gent fee” agreement. See, S.Rep. No. 94-1011, reprinted in,

1976 U.S.C.C.A.N. 5908, 5910 (recognizing that civil rights

plaintiffs generally obtain injunctive relief that is sometimes

accompanied by a modest damage award). Thus, the plaintiff

may be able to vindicate her civil rights only if a PILF

represents her free of charge. See, e.g., Missouri v. Jenkins,

491 U.S. 274 (1989) (students represented by NAACP in

school desegregation case). If these attorneys’ fees were

included in the plaintiff’s gross income, she would be faced

with a huge tax liability that she could not pay, which would

create an insurmountable disincentive for her to vindicate

her civil rights or to resist unlawful or unconscionable

conduct by the federal or state governments. See, e.g., Sager

and Cohen, How the Income Tax Undermines Civil Rights

Law, 73 S. Cal. L. Rev. 1075 (2000).

Thus, the amici herein deem it critical that their views

of the issue before the Court be heard and that this Court’s

decision not be so expansive as to allow the Commissioner to

argue that attorneys’ fees recovered by PILFs are taxable to

their clients. *

e

* Without willing clients, PILFs could not fulfill their charitable

purposes. Granted, PILFs could waive any attorneys’ fees to which they

may be entitled under fee-shifting statutes and, thus, avoid any

potential tax liability to their clients. However, by allowing PILFs to

receive attorneys’ fees under fee-shifting statutes, Congress concluded

that the receipt of these fees will ensure the continued existence and

viability of PILFs, in order to fulfill the purposes intended by Congress.

6

STATEMENT OF THE CASE

Amici agree with the Statement of the Case set forth

in the briefs of the Respondents.

¢

SUMMARY OF THE ARGUMENT

The opinions of the Sixth and Ninth Circuits should

be affirmed. However, should the Court reverse those

decisions and rule in favor of the Commissioner, this Court

should make clear that its ruling has no application to

PILFs. PILFs’ “representation” agreements are not “con-

tingent fee” agreements, as set out in the Question Pre-

sented, because they do not involve the assignment of any

client income or the discharge of any client indebtedness.

Therefore, attorneys’ fees recovered by PILFs under

federal fee-shifting statutes are not includable in the gross

income of PILFs’ clients.

e

ARGUMENT

I. THE OPINIONS OF THE SIXTH AND NINTH

CIRCUITS SHOULD BE AFFIRMED.

Amici agree with Respondents, in the particularized

context of the facts and Question Presented: “Whether the

gross income from the proceeds of litigation includes the

portion of his damages recovery that is paid to his attor-

neys pursuant to a contingent fee agreement.” In this

context, amici support Respondents on the following

points:

7

1. The attorneys’ fees paid to the attorneys in

these cases were earned by the attorneys and

not the clients.

2. The position of the Commissioner in these

cases results in double taxation.

3. The contingent fee agreements in these cases

were in the nature of partnerships, joint ven-

tures, or co-ownership of the claims and no

assignment of income resulted from these

agreements.

4. The attorneys’ fees paid to the attorneys in

these cases are not taxable to their clients.

In addition to the arguments set forth by Respon-

dents, amici submit that this Court should uphold the

opinions below because amici may be impacted adversely

by a decision in favor of the Commissioner if the language

of any such decision is sufficiently expansive to permit the

Commissioner to apply it to tax PILFs’ clients for attor-

neys’ fees recovered by PILFs under federal fee-shifting

statutes. Because this issue is critically different factually

and legally from that presented to the Court in the cases

before it, the amici have unique information and perspec-

tive that can assist the Court concerning the possible

application the Commissioner may make of this case to tax

PILFs’ clients for the attorneys’ fees recovered by PILFs

under federal fee-shifting statutes.

Il. PILFs’ “REPRESENTATION” AGREEMENTS

ARE NOT “CONTINGENT FEE” AGREEMENTS.

Should this Court determine that the fees paid to the

attorneys in these cases are taxable income of their cli-

ents, this Court should provide that its holding does not

8

apply to “representation” agreements entered into by

PILFs and their clients because those agreements are not

“contingent fee” agreements that anticipatorily assign

income or discharge debt.

There are only two theories on which the taxability to

a client of attorneys’ fees paid to the client’s attorney,

pursuant to a “contingent fee” agreement, may be predi-

cated: .

1. The “contingent fee” agreement constitutes

an anticipatory assignment of taxable income

earned by the client under Lucas v. Earl, 281

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

U.S. 112 (1940). This requires a finding that

some or all of the damage award represents

the recovery of income earned by the client,

under 26 U.S.C. § 61, and the attorney is to

be paid from that damage award in an

amount determined with reference to the

amount of that award; or

2. The “contingent fee” agreement obligates the

client to pay attorneys’ fees determined by

the amount of a damage award and those fees

are paid by the opposing party, which consti-

tutes a discharge of the client’s indebtedness

to the attorney, under 26 U.S.C. § 61(a)(12).

Neither of these theories applies to the unique “repre-

sentation” agreements entered into by PILFs and their

clients. PILFs’ agreements are neither “contingent” agree-

ments nor “fee” agreements as those terms are used in the

Question Presented. Moreover, PILFs’ “representation”

agreements result in neither an anticipatory assignment

of income by, nor a discharge of indebtedness of, the PILFs’

clients.

9

A. REPRESENTATION AGREEMENTS _ BE-

TWEEN PILFs AND THEIR CLIENTS DO

NOT CONSTITUTE AN ANTICIPATORY AS-

SIGNMENT OF INCOME BY THEIR CLI-

ENTS TO PILFs.

1) PILFs’ attorneys’ fees cannot constitute

an assignment of income because the

fees are recovered from third parties,

not from any taxable damage award to

their clients.

Unlike the Sixth and Ninth Circuits, several other

circuits have held that attorneys’ fees paid by a defendant

to a plaintiff’s attorneys pursuant to a “contingent fee”

agreement must be included in the plaintiff’s gross income

based upon the anticipatory assignment of income doc-

trine. E.g., Kenseth v. Commn’r, 259 F.3d 881 (7th Cir.

2001); Young v. Commn’r, 240 F.3d 369, 376-79 (4th Cir.

2001); Hukkanen-Campbell v. Commn’r, 274 F.3d 1312,

1313-15 (10th Cir. 2001), cert. denied, 535 U.S. 1056

(2002); Baylin v. United States, 43 F.3d 1451, 1454 (Fed.

Cir. 1995). The agreements that those cases address are

totally different from the “representation” agreements

between PILFs and their clients. Those cases involved

“contingent fee” agreements that entitled the attorneys to

recover fees from their clients’ damage awards based on

the amount of those awards.

For example, in Kenseth, the plaintiff entered into a

“contingent fee” agreement with a law firm to represent

him in an age-discrimination suit against his former

employer seeking, inter alia, a recovery of taxable past

wages. 259 F.3d at 882. Pursuant to that agreement, the

law firm received 40 percent of the proceeds of the settle-

ment entered into between the plaintiff and his former

10

employer. Id. The Seventh Circuit determined that the

“contingent fee” agreement had effectuated an anticipa-

tory assignment of gross income earned by the client to the

client’s lawyer, contrary to Earl and Horst, supra at 8.

However, PILFs’ “representation” agreements, consis-

tent with PILFs’ charitable purposes, do not allow PILFs

to recover anything at all from damage awards or to

determine the amount of attorneys’ fees PILFs may

recover under federal fee-shifting statutes by reference to

the amount of such damage awards. Rather, PILFs, under

agreement and applicable law, may recover only what the

Court determines is a fair and reasonable amount, based

on time spent, the complexity of the issues, and other

factors, all in accordance with federal fee-shifting statutes.

Because PILFs’ agreements and applicable law do not

permit PILFs: to recover attorneys’ fees from any damages

awarded to the clients; to base their attorneys’ fees on the

amounts of those damages; or indeed, even to consider

attorneys’ fees in deciding whether to take the case; the

“representation” agreements of PILFs do not involve the

anticipatory assignment of a client’s gross income.

2) Attorneys’ fees recovered by PILFs un-

der federal fee-shifting statutes are

earned by the PILF, not by the client,

and therefore do not involve an as-

signment of the client’s income.

Two cases, Earl, 281 U.S. at 114-15 (1930), and Horst,

311 U.S. at 114 (1940), formulated the “anticipatory

assignment of income doctrine” and established the “first

principle of income taxation: income must be taxed to him

who earns it.” Commn’r v. Culbertson, 337 U.S. 733, 739-

740 (1949).

11

The anticipatory assignment of income doctrine

cannot and does not apply to PILFs because PILFs, and

not their clients, “earn” the attorneys’ fees that might be

awarded. Indeed, it is well established that pro se litigants

are not entitled to attorneys’ fees under federal fee-shifting

statutes. E.g., Corrigan v. United States, 27 F.3d 436 (9th

Cir. 1994) (pro se litigants are not entitled to attorneys’

fees under IRC § 7430); Krecioch v. United States, 316 F.3d

684, 688 (7th Cir. 2003) (pro se litigants are not entitled to

attorneys’ fees under the Equal Access to Justice Act

(“EAJA”), 28 U.S.C. § 2412); Smith v. DeBartoli, 769 F.2d

451, 453 (7th Cir. 1985) (pro se litigants are not entitled to

attorneys’ fees under the Civil Rights Attorney’s Fees

Award Act of 1976, 42 U.S.C. § 1988); Naekel v. Dep't of

Transportation, 845 F.2d 976, 979-980 (Fed. Cir. 1988) (pro

se litigants are not entitled to attorneys’ fees under Back

Pay Act, 5 U.S.C. § 5596(b\(1)A)). Thus, if the PILFs’

clients had represented themselves pro se, they would not

have been entitled to an award of attorneys’ fees. Hence,

any attorneys’ fees that may be recovered by PILFs are

“earned” solely by the PILF that represents the client, not

by the client. Therefore, the attorneys’ fees, if taxable,

must be taxed only to the PILF as the “tree” from which

the “fruits” (i.e., attorneys’ fees) “grew.” Earl, 281 U.S. at

115. A contrary conclusion would violate the “first princi-

ple of income taxation: that income must be taxed to him

who earns it.” Culbertson, 337 U.S. at 739-740.

The Commissioner might argue that the clients

“earned” the attorneys’ fees recovered by PILFs because,

under most fee-shifting statutes, the client, as the prevail-

ing party, is the one who is deemed to have incurred the

attorneys’ fees and, hence, the one who is entitled to an

award of those fees. See, e.g., Uniform Relocation Assistance

12

and Real Property Acquisition Policies Act (URA) 42

U.S.C. § 4654(c) (“the court . . . shall determine and award

... plaintiff ... reasonable attorneys fees”); 42 U.S.C.

§ 1988 (a court may award reasonable attorneys’ fees to a

“prevailing party”); see also, Evans v. Jeff D., 475 U.S. 717,

731-732 (1986) (42 U.S.C. § 1988 does not bestow fee

awards upon attorneys). The Commissioner’s argument

would be in error.

Although PILFs receive attorneys’ fees for their

representation of their clients, the clients are not obligated

to pay any attorneys’ fees because, in accordance with

PILFs’ charitable nature and Rev. Proc. 92-59, PILFs

provide their legal services to clients free of charge.’ The

clients do agree, however, that, if awards of attorneys’ fees

were available under federal fee-shifting statutes, PILF's

may seek those awards in the clients’ names, as required

by law. The clients further agree that any attorneys’ fees

recovered are the property of the PILFs.

The relationship between PILFs and their clients is

analogous to the facts addressed by the Commissioner in

Rev. Rul. 65-282, which involved a state law that provided

that attorneys representing indigent clients were eligible

for court-awarded attorneys’ fees. Jd. The question pre-

sented was whether an attorney who receives these court-

awarded fees must include them in his gross income even

though he is obligated contractually to turn the fees over

to his employer, a legal aid society. Jd. The Commissioner

held that such fees were excluded from the attorney's

* The value of these services is not to be included in a client's gross

income because the services were provided gratuitously by a charitable

organization. Cf. 26 U.S.C. § 102 (excluding gifts from the definition of

gross income).

13

gross income because the attorney received those fees as

an “agent([] for the legal aid society.” Jd.; see also, Rev. Rul.

69-274.

Likewise, PILFs’ clients act only as the PILFs’ agents

in applying for and, possibly, in being determined to have

“incurred” attorneys’ fees: Beeause the federal fee-shifting

statutes provide that only the client is eligible for attor-

neys’ fees, the attorney’s fee application must be submitted

in the name of the client. Cf. Phillips v. General Services

Admin., 924 F.3d 1577, 1582 (Fed. Cir. 1991) (request for

attorneys’ fees under EAJA must be made on behalf of the

“prevailing party”).

Rev. Rul. 80-364, which involved a suit filed by a

union on behalf of its members against a company for

violating a collective bargaining agreement, further

supports this conclusion. After filing suit, the union and

the company entered into a settlement agreement under

which the company paid the union $40,000.00 in full

settlement of all claims. Jd. The union kept $6,000.00 of

the settlement as attorneys’ fees and returned $34,000.00

to the employees for back pay owed to them. Jd. The back

pay was distributed among the employees in proportion to

their claims. Jd.

The Commissioner concluded that the amount of the

settlement that went toward attorneys’ fees was not

remuneration to the individual employees because the

attorneys’ fees reimbursed the union for expenses incurred

to enforce the collective bargaining agreement. Jd. Thus,

although the union members had to pay taxes on the back

pay they received, the attorneys’ fees were excluded from

their gross income. Jd. In reaching this conclusion, the

Commissioner evidently applied the “first principle of

14

income taxation: that income must be taxed to him who

earns it.” Culbertson, supra, 337 U.S. at 739-40.

There is no appreciable distinction between the facts

in Rev. Rul. 80-364 and the facts involving the “represen-

tation” agreements of-PILFs. Indeed, as to both cases: (1)

the attorneys provide legal services to their clients free of

charge; (2) there is a payment to the client that consti-

tutes either back pay or “just compensation”; (3) there is

an agreement or statute that allows for court-awarded

attorneys’ fees; and (4) the clients have no legal claim to

any attorneys’ fees. If the attorneys’ fees were not included

in the client’s gross income in Rev. Rul. 80-364, a fortiori,

they may not be included in PILFs’ clients’ gross income.

B. THE RECOVERY OF ATTORNEYS’ FEES

BY PILFs PURSUANT TO FEDERAL FEE-

SHIFTING STATUTES DOES NOT CON-

STITUTE THE DISCHARGE OF AN IN-

DEBTEDNESS.

The Commissioner considers attorneys’ fees paid by a

defendant to a plaintiff’s attorney, pursuant to a “contin-

gent fee” agreement, to be a discharge of a debt and,

therefore, includable in the plaintiff’s gross income.

(Comm'rs’ Brief at 19) See, 26 U.S.C. § 61(a)(12) (defining

“gross income” to include “liJncome from discharge of

indebtedness”). The Commissioner relies on Old Colony

Trust Co. v. Commissioner, 279 U.S. 716 (1929) (Comm’rs’

Brief at 19), which does not involve attorneys’ fees, and

* Although the union may have been the “named” plaintiff in Rev.

Rul. 80-364, the “real” clients were the union members. See, Hunt v.

Washington Apple Adver. Comm'n, 432 U.S. 333, 341-344 (1977)

(establish. ng that an association may sue on behalf of its members).

15

could have cited, as well, Sinyard v. Commn’r, 286 F.3d

756, 757 (9th Cir. 2001), cert. denied, 536 U.S. 904 (2002),

which does involve attorneys’ fees. In Sinyard, the plaintiff

entered into a “contingent fee” agreement with a law firm

to represent him in two class action lawsuits against his

former employer. Pursuant to that agreement, the law

firm was to receive “one-third” of any recovery. Jd. The

lawsuits were settled with the former employer paying

directly to the law firm the amount of attorneys’ fees that

the former employee owed. Jd. at 757-758. In a split

decision, a panel of the Ninth Circuit ruled that the

attorneys’ fees were includable in the client’s gross income

because the former employer, in paying the attorneys’ fees

directly to the attorney, was paying a debt that the client

owed to his attorney. Jd. at 758. This rule does not apply to

PILFs.

PILFs are non-profit organizations that may not

consider the possibility of the attorneys’ fees available

under federal fee-shifting statutes when they undertake to

represent their clients, may not undertake cases in which

an award of attorneys’ fees is possible if the client can

reasonably retain private counsel, and must represent

their clients free of charge. Therefore, recovery of attor-

neys’ fees by PILF’s under federal fee-shifting statutes does

not constitute the discharge of the clients’ indebtedness.

By agreement and by law, clients do not owe PILFs one

penny for attorneys’ fees, nor m3 those fees be charged to

or recovered from PILFs’ clieats. There being no ability to

assess and no obligation tc pay attorneys’ fees, there can

be no indebtedness to be dis charged. Indeed, the obligation to

pay attorneys’ fees belongs to the party ordered to do so

under federal fee-shifting statutes. See, eg, 42 U.S.C.

§ 4654(c) (the court “shall determine and award” reasonable

16

attorneys’ fees) (emph. supp.). Therefore, in paying attor-

neys’ fees, the federal or state government agency or

subdivision could not be discharging a debt owed by or a

contractual obligation of the PILF’s client. Instead, it

would be satisfying only its own statutory obligation.

Moreover, “representation” agreements of PILFs are

not “contingent fee” agreements as that phrase is used in

the Question Presented. Such agreements are only “con-

tingent if the obligation to pay depends on a particular

result being obtained.” City of Burlington v. Dague, 505

U.S. 557, 561 (1992). Generally, if the client does not win,

no debt arises and the attorney does not get paid. /d.

Thus, “contingent fee” agreements allow clients who are

unable to finance their own litigation to pursue their

claims by assigning a portion of any future damage award

to an attorney in exchange for the attorney’s assumption of

the financial risk associated with an unsuccessful out-

come. Gisbrecht v. Barnhart, 535 U.S. 789, 810 (2002)

(Scalia, J., dissenting). Attorneys are willing to assume the

risk associated with such agreements because, inter alia,

those agreements allow them to expand their potential

client base to include clients who cannot afford to pay an

hourly fee.

Thus, the distinctive characteristics of a “contingent

fee” agreement include: (1) a debt will be incurred by the

plaintiff to his attorney if he prevails by recovering a

damage award: (2) that debt will be discharged by either

the plaintiff or a third party; and (3) the attorney pos-

sesses a pecuniary interest that is determined by reference

to the amount of and payable from the damages awarded

to the client. By contrast, the “representation” agreements

of PILFs contain none of these elements because attorneys’

fees are neither paid from nor determined by the amount

17

of the damages awarded and there is no debt incurred by

the client to the PILF.

Ill. PUBLIC POLICY DICTATES THAT ANY AT-

TORNEYS’ FEES RECOVERED BY PILFs

PURSUANT TO FEDERAL FEE-SHIFTING

STATUTES NOT BE INCLUDED IN THE

GROSS INCOME OF THEIR CLIENTS.

A decision sufficiently expansive to allow the Commis-

sioner to argue that attorneys’ fees recovered by PILFs are

taxable to their clients is not in the public interest. Con-

gress has recognized expressly that a successful civil

rights plaintiff acts, not only for herself, but also as a

“private attorney general” by “vindicating a policy that

Congress considered of the highest priority.” See, S.Rep.

No. 94-1011, reprinted in, 1976 U.S.C.C.A.N. 5908, 5910. A

putative civil rights plaintiff, however, will not file suit if

she may incur a tax liability when her PILF receives

court-awarded attorneys’ fees under a fee-shifting statute.

Thus, if the Commissioner is successful here, the entire

nation, not just the individual citizen, will suffer because

“those who violate the Nation’s fundamentals laws” will do

so with “impunity.” Jd.

Not only would enforcement of federal civil rights laws

suffer, but enforcement of federal environmental laws will

also suffer. Since 1970, Congress has allowed private

citizens to enforce federal environmental laws by including

“citizen suit” provisions in them. See, e.g., the Clean Air

Act, 42 U.S.C. § 7604(d); the Clean Water Act, 33 U.S.C.

§ 1365; the Resource Conservation and Recovery Act, 42

U.S.C. §$6972(e); the Comprehensive Environmental

Response, Compensation and Liability Act, 42 U.S.C.

§ 9659(; and the Endangered Species Act, 16 U.S.C.

18

§ 1540(g). These “citizen suit” provisions generally author-

ize two types of actions: (1) enforcement actions against

violators; and (2) actions to compel the appropriate federal

agency to perform nondiscretionary duties required by the

statute. Dunne, Attorney’s Fees For Citizen Enforcement of

Environmental Statutes: The Obstacles for Public Interest

Law Firms, 9 Stan Envtl. L.J. 1, 2-3 (1990). Because these

“citizen suits” do not result in an award of damages,

Congress included an attorneys’ fees provision that allows

courts to award attorneys’ fees to the “successful citizen-

enforcers.” Jd. Congress included these attorneys’ fees

provisions to ensure that the “citizen-enforcers” had

competent representation. Jd. at 5. Moreover, Congress

sought to entice PILFs to represent “citizen-enforcers” by

allowing the PILFs to recover their attorneys’ fees under

these fee-shifting provisions. Jd. at 8.

Congress’ intent, however, would be defeated if “citi-

zen-enforcers” had to include the attorneys’ fees that were

awarded to their PILFs in their gross income. Indeed,

under such a scenario, putative “citizen-enforcers” of

modest means would not file suit because they could not

afford the concomitant tax liability. This would leave the

enforcement of federal environmental statutes to either

the wealthy or the federal government, neither of which is

a “suitable champion” to ensure compliance with federal

environmental laws.’

The effects of a ruling sufficiently expansive to allow

the Commissioner to argue that the recovery of attorneys’

* Indeed, if the federal government were capable of ensuring

compliance with all of the federal environmental statutes, Congress

would have had no reasen to include “citizen suit” provisions in those

statutes.

19

fees by PILFs is taxable to their clients will also be felt

outside the PILF arena. Take, for example, a union that

represents a member, on a pro bono basis, in a wrongful

discharge suit. If the union prevails, it may be entitled to

court-awarded attorneys’ fees under either a federal fee-

shifting provision or a collective bargaining agreement.

See, Raney v. Federal Bureau of Prisons, 222 F.3d 927

(Fed. Cir. 2000) (federal employee union entitled to attor-

neys’ fees under the Back Pay Act). There has been no

suggestion that the union member must include the

attorneys’ fees received by the union in his gross income.

See, Rev. Rul. 80-364 (payment of union’s attorneys’ fees

not includable in a union member’s “gross income”). Yet,

an expansive ruling in the instant cases might yield that

result.

Finally, clients of the private bar will also feel the

effects of an adverse ruling. Most states recommend that

private attorneys provide a certain amount of pro bono legal

services each year. E.g., Colorado Rules of Professional

Conduct 6.1 (recommending 50 hours per year). Many

attorneys fulfill this goal by representing indigent clients.

Although these attorneys do not charge their clients a fee,

often a court will award fees to the attorney under a fee-

shifting statute. A sufficiently expansive adverse ruling in

the instant cases, however, could result in the inclusion of

such attorneys’ fees in the gross income of an indigent

client. Such a result would mean that taxes would be paid

on the attorneys’ fees twice, once by the private attorney

and once by the indigent client. More seriously, such a

result would deny legal representation to indigent clients.

Porter v. U.S. Agency for Int'l Dev., 293 F.Supp.2d 152,

155-57 (D.D.C. 2003).

20

CONCLUSION

The opinions of the Sixth and Ninth Circuits should

be affirmed. However, should the Court reverse those

decisions and rule in favor of the Commissioner, this Court

should make clear that its ruling has no application to

PILFs because those agreements do not assign any income

of their clients and because recovery by PILFs of attorneys’

fees under federal fee-shifting statutes is not a discharge

of any client indebtedness. Hence, the “representation”

agreements of PILFs are not “contingent fee” agreements,

as used in the Question Presented, and attorney fees

recovered by PILFs under federal fee-shifting statutes are

not includable in the gross income of PILFs’ clients.

Respectfully submitted,

WILLIAM PERRY PENDLEY*

*Counsel of Record

J. Scott DETAMORE

MOUNTAIN STATES LEGAL FOUNDATION

2596 South Lewis Way

Lakewood, Colorado 80227

(303) 292-2021

Attorneys for Amici Curiae