Case Summary
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 contingent fee agreement.
Whether a “representation agreement” between a public interest law firm (PILF) and its client is a “contingent fee agreement” such that, should the Supreme Court answer the Question Presented in the affirmative, attorneys’ fees paid to the PILF constitute “gross income” to the client?
Plaintiff:
Commissioner, Internal Revenue Service
Defendant:
John W. Banks, II and Sigitas J. Banaitis
Amicus Curiae:
Mountain States Legal Foundation and other PILFs filed a brief amici curiae on August 18, 2004.
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Case History
The IRS maintains that attorneys’ fees paid to attorneys are gross income to the client either because the client assigns income he was to receive to his attorney for the payment of fees he owes his attorney, or the attorneys’ fees he owes his attorney are paid by a third party. Though most circuits agree with the IRS’s view as to “contingent fee agreements” by for-profit attorneys, no court has done so regarding “representation agreements” between PILFs and their clients under which no fees are owed, no income is assigned, no debt is relieved, and damages are awarded rarely. MSLF feared that, if the Supreme Court ruled for the IRS, the IRS would use the ruling to assert that attorneys’ fees paid to PILFs constitute “gross income” to their clients. MSLF and other PILFs urged the Court to ensure that its ruling did not address this issue. On March 29, 2004, the Supreme Court agreed to hear the case. On November 1, 2004, the Supreme Court held arguments in the case.
